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Competitive Markets with Endogenous Health Risks

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We study a general equilibrium model where agents’ preferences, productivity and labor 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 di¤erent occupations. Under mild assumptions, workers with riskier jobs must get higher expected utilities if health a¤ects production capabilities. The same holds if health affects preferences and health enhancing consumption activities are sufficiently effective, so that income and health are substitutes. The converse obtains when health a¤ects 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 Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 145.

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Date of creation: 01 Oct 2005
Date of revision: 01 Mar 2008
Handle: RePEc:sef:csefwp:145

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

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