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

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  • LEROUX, Marie-Louise
  • PONTHIERE, Gregory

Abstract

This paper studies the normative problem of redistribution between agents who can infuence 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, a two-period model is developed, where agents' preferences on lotteries of life can be represented by a mean and variance utility function allowing, unlike the expected utility form, some sensitivity to what Allais (1953) calls the dispersion of psychological values. It is shown that if agents ignore the impact of their health spending on the return of their savings, the decentralization of the first-best utilitarian optimum requires intergroup lump-sum transfers and group-specifc taxes on health spending. Under asymmetric information, we find that subsidizing health expenditures may be optimal as a way to solve the incentive problem.

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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 RP with number -2158.

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Handle: RePEc:cor:louvrp:-2158

Note: In : International Tax and Public Finance, 16, 514-537, 2009
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References

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  1. Antoine Bommier, 2001. "Uncertain lifetime and intertemporal choice : risk aversion as a rationale for time discounting," Research Unit Working Papers 0108, Laboratoire d'Economie Appliquee, INRA.
  2. Eytan Sheshinski, 2007. "Introduction to The Economic Theory of Annuities
    [The Economic Theory of Annuities]
    ," Introductory Chapters, Princeton University Press.
  3. Tomas J. Philipson & Gary S. Becker, 1998. "Old-Age Longevity and Mortality-Contingent Claims," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 551-573, June.
  4. Broome, John, 2004. "Weighing Lives," OUP Catalogue, Oxford University Press, number 9780199243761.
  5. Frederick Mosteller & Philip Nogee, 1951. "An Experimental Measurement of Utility," Journal of Political Economy, University of Chicago Press, vol. 59, pages 371.
  6. Gary S. Becker & Tomas J. Philipson & Rodrigo R. Soares, 2005. "The Quantity and Quality of Life and the Evolution of World Inequality," American Economic Review, American Economic Association, vol. 95(1), pages 277-291, March.
  7. LEROUX, Marie-Louise, 2008. "Endogenous differential mortality, non monitored effort and optimal non linear taxation," CORE Discussion Papers 2008029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Eytan Sheshinski, 2007. "The Economic Theory of Annuities," Economics Books, Princeton University Press, edition 1, volume 1, number 8536.
  9. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
  10. Loomes, Graham & Sugden, Robert, 1987. "Some implications of a more general form of regret theory," Journal of Economic Theory, Elsevier, vol. 41(2), pages 270-287, April.
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Cited by:
  1. Grégory Ponthière & Marie-Louise Leroux, 2009. "Utilitarianism and unequal longevities: A remedy?," PSE Working Papers halshs-00566858, HAL.
  2. Pierre Pestieau & Grégory Ponthiere, 2012. "On the Policy Implications of Changing Longevity," CESifo Working Paper Series 3926, CESifo Group Munich.
  3. Marie-Louise Leroux & Pierre Pestieau & Grégory Ponthiere, 2009. "Should we Subsidize Longevity?," CESifo Working Paper Series 2614, CESifo Group Munich.
  4. Pierre Pestieau & Gregory Ponthiere, 2012. "The Public Economics of Increasing Longevity," Hacienda Pública Española, IEF, vol. 200(1), pages 41-74, March.
  5. Marie-Louise Leroux & Grégory Ponthière, 2009. "Wives, husbands and wheelchairs: Optimal tax policy under gender-specific health," Working Papers halshs-00575059, HAL.
  6. Marie-Louise Leroux & Pierre Pestieau & Grégory Ponthière, 2008. "Should we subsidize longevity?," Working Papers halshs-00586236, HAL.
  7. Grégory Ponthière & Marie-Louise Leroux, 2009. "Utilitarianism and unequal longevities: A remedy?," Working Papers halshs-00566858, HAL.
  8. Pierre Pestieau & Grégory Ponthière, 2012. "The public economics of increasing longevity," Working Papers halshs-00676492, HAL.
  9. Marie-Louise Leroux & Grégory Ponthière, 2009. "Wives, husbands and wheelchairs: Optimal tax policy under gender-specific health," PSE Working Papers halshs-00575059, HAL.

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