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Optimal tax policy and expected longevity: a mean and variance approach

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  • LEROUX, Marie-Louise

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • PONTHIERE, Grégory

Abstract

This paper studies the normative problem of redistribution between agents who can influence their survival probability through private health spending, but who differ in their attitude towards the risks involved in the lotteries of life to be chosen. For that purpose, we develop a two-period model where agents's preferences on lotteries of life can be represented by a mean and variance utility function allowing, unlike the expected utility form, some – agent-specific – sensitivity to what Allais (1953) calls the 'dispersion of psychological values'. It is shown that if agents ignore the impact of their health expenditures on the return of their savings, the decentralization of the first-best optimum requires not only intergroup lump-sum transfers, but, also, group-specific taxes on health spending. Under asymmetric information, we find that a subsidy on savings is optimal, whereas group-specific taxes on health spending are of ambiguous signs.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2008039.

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Date of creation: 01 Jun 2008
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Handle: RePEc:cor:louvco:2008039

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Related research

Keywords: longevity; risk; lotteries of life; expected utility theory; health spending.;

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Cited by:
  1. LEROUX, Marie - Louise & PONTHIERE, Grégory, 2009. "Wives, husbands and wheelchairs : Optimal tax policy under gender-specific health," CORE Discussion Papers 2009071, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Pierre Pestieau & Grégory Ponthière, 2012. "The public economics of increasing longevity," PSE Working Papers halshs-00676492, HAL.
  3. Marie-Louise Leroux & Pierre Pestieau & Grégory Ponthière, 2008. "Should we subsidize longevity?," PSE Working Papers halshs-00586236, HAL.
  4. repec:hal:wpaper:halshs-00586236 is not listed on IDEAS
  5. Grégory Ponthière & Marie-Louise Leroux, 2009. "Utilitarianism and unequal longevities: A remedy?," PSE Working Papers halshs-00566858, HAL.
  6. Pierre Pestieau & Grégory Ponthiere, 2012. "On the Policy Implications of Changing Longevity," CESifo Working Paper Series 3926, CESifo Group Munich.

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