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Optimal saving and health prevention

Author

Listed:
  • Desu Liu

    (Nanjing University)

  • Mario Menegatti

    (Università degli Studi di Parma)

Abstract

This paper examines contemporaneous choices of saving and health prevention under a two-argument utility of wealth and health. Unlike the traditional approach to modelling the cost of prevention as a decline in wealth, health prevention here is assumed to mainly reduce current health level in exchange for a lower probability of contracting a disease in the future. We show that the optimal levels of the two instruments of risk management can move either in the same direction or in opposite directions. One key element in distinguishing these two cases is whether a decision maker is correlation averse or correlation prone. Together with the relative importance of substitution effect over income effect on saving, the sign of correlation attitude is also relevant in determining the reaction of optimal saving and health prevention when the interest rate changes. Lastly, several combinations of preferences in different aspects are provided, which lead to unambiguous effects of a background risk in wealth on the two optimal choices.

Suggested Citation

  • Desu Liu & Mario Menegatti, 2019. "Optimal saving and health prevention," Journal of Economics, Springer, vol. 128(2), pages 177-191, October.
    • Handle: RePEc:kap:jeczfn:v:128:y:2019:i:2:d:10.1007_s00712-018-00652-6
    DOI: 10.1007/s00712-018-00652-6
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    References listed on IDEAS

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    Cited by:

    1. Donatella Baiardi & Marco Magnani & Mario Menegatti, 2020. "The theory of precautionary saving: an overview of recent developments," Review of Economics of the Household, Springer, vol. 18(2), pages 513-542, June.
    2. Christophe Courbage & Richard Peter & Béatrice Rey, 2022. "Incentive and welfare effects of correlated returns," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(1), pages 5-34, March.
    3. Sylvie Démurger & Siwar Khelifa & Béatrice Rey, 2023. "Rural-urban migration as a risk coping strategy: The role of income differentials," IRENE Policy Reports 23-03, IRENE Institute of Economic Research.
    4. Sylvie Démurger & Siwar Khelifa & Béatrice Rey, 2023. "Rural-urban migration as a risk coping strategy: The role of income differentials," IRENE Working Papers 23-03, IRENE Institute of Economic Research.
    5. David Crainich & Louis Eeckhoudt & Mario Menegatti, 2019. "Vaccination as a trade-off between risks," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 5(3), pages 455-472, October.

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    More about this item

    Keywords

    Saving; Health prevention; Correlation aversion/loving; Background risk;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving

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