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

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Author Info

  • Marie-Louise Leroux

    (CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain (UCL) - Belgique)

  • Grégory Ponthière

    (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

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 HAL in its series PSE Working Papers with number halshs-00586247.

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Date of creation: Sep 2008
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Handle: RePEc:hal:psewpa:halshs-00586247

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Related research

Keywords: longevity ; risk ; lotteries of life ; non-expected utility theory ; moments of utility theory ; health spending;

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References

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  1. Gary S. Becker & Tomas J. Philipson & Rodrigo R. Soares, 2003. "The Quantity and Quality of Life and the Evolution of World Inequality," NBER Working Papers 9765, National Bureau of Economic Research, Inc.
  2. 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).
  3. Antoine Bommier, 2006. "Uncertain Lifetime And Intertemporal Choice: Risk Aversion As A Rationale For Time Discounting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(4), pages 1223-1246, November.
  4. Broome, John, 2004. "Weighing Lives," OUP Catalogue, Oxford University Press, number 9780199243761, September.
  5. Eytan Sheshinski, 2007. "Introduction to The Economic Theory of Annuities
    [The Economic Theory of Annuities]
    ," Introductory Chapters, Princeton University Press.
  6. 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.
  7. Frederick Mosteller & Philip Nogee, 1951. "An Experimental Measurement of Utility," Journal of Political Economy, University of Chicago Press, vol. 59, pages 371.
  8. Eytan Sheshinski, 2007. "The Economic Theory of Annuities," Economics Books, Princeton University Press, edition 1, volume 1, number 8536.
  9. 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.
  10. 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.
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Cited by:
  1. LEROUX, Marie - Louise & PONTHIERE, Grégory, 2010. "Utilitarianism and unequal longevities : A remedy?," CORE Discussion Papers 2010043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. repec:hal:wpaper:halshs-00566858 is not listed on IDEAS
  3. PESTIEAU, Pierre & PONTHIERE, Grégory, 2012. "The public economics of increasing longevity," CORE Discussion Papers 2012005, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Pierre Pestieau & Grégory Ponthiere, 2012. "On the Policy Implications of Changing Longevity," CESifo Working Paper Series 3926, CESifo Group Munich.
  5. repec:hal:wpaper:halshs-00575059 is not listed on IDEAS
  6. repec:hal:wpaper:halshs-00676492 is not listed on IDEAS
  7. Marie-Louise Leroux & Pierre Pestieau & Grégory Ponthière, 2008. "Should we subsidize longevity?," PSE Working Papers halshs-00586236, HAL.
  8. Marie-Louise Leroux & Grégory Ponthière, 2009. "Wives, husbands and wheelchairs: Optimal tax policy under gender-specific health," PSE Working Papers halshs-00575059, HAL.
  9. repec:hal:wpaper:halshs-00586236 is not listed on IDEAS

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