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Competitive Markets with Endogenous Health Risks

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Author Info
Bennardo, Alberto
Piccolo, Salvatore

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Abstract

We study a general equilibrium model where agents' preferences, productivity and labour endowments depend on their health status, and occupational choices affect individual health distributions. Efficiency typically requires agents of the same type to obtain different expected utilities if assigned to different occupations. Under mild assumptions, workers with riskier jobs must get higher expected utilities if health aspects production capabilities. The same holds if health aspects preferences and health enhancing consumption activities are sufficiently effective, so that income and health are substitutes. The converse obtains when health aspects preferences, but health enhancing consumption activities are not very effective, and hence income and health are complements. Competitive equilibria are first- best if lottery contracts are enforceable, but typically not if only assets with deterministic payoffs are traded. Compensating wage differentials which equalize the utilities of workers in different jobs are incompatible with ex-ante efficiency. Finally, absent asymmetric information, there exist deterministic cross-jobs transfers leading to ex-ante efficiency.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5385.

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Date of creation: Dec 2005
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Handle: RePEc:cpr:ceprdp:5385

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Related research
Keywords: compensating wage differentials; competitive markets; individual health risks; Pareto efficiency;

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Find related papers by JEL classification:
D5 - Microeconomics - - General Equilibrium and Disequilibrium
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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