Evaluating Health Care Externality Costs Generated by Risky Consumption Goods
AbstractWe present an overlapping-generations (OLG) macroeconomic model that applies a behavioral interpretation of preferences for goods that generate health risks. In this paper proneness to poor health is viewed as a cognitive miscalculation by economic agents between their expected health state over various consumption bundles and the actual health care they require for their health outcome. To model this the paper borrows insight from prospect theory and applies the reference-dependent preference framework to the specication of out utility model. In our model of the economy individual preferences are decomposed into intrinsic consumption utility and gain-loss utility associated with the miscalculation. Agents in the economy are stratied in their health states as well as their expected health care consumption according to some probability measure over the population. Heterogeneity introduced in this way generates consumers of varied proneness to risk associated with consumption of unhealthy goods because individuals have various marginal valuations of their miscalculation. In such a population, when all agents pay the same insurance premium, health-conscious agents shoulder the health care costs of their less health-conscious counterparts and the less health-conscious are engaged in less healthy consumption than they would if they paid actuarially fair premia. We demonstrate these eects in simulations by comparing the risk pooling equilibria to the actuarially fair pricing equilibria. This paper introduces the mathematical programming equilibrium constraint (MPEC) computational approach to compute model equilibria; we believe this approach is new to heterogeneous agent OLG model simulation.
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Bibliographic InfoPaper provided by University of Connecticut, Department of Economics in its series Working papers with number 2009-43.
Length: 29 pages
Date of creation: Dec 2009
Date of revision:
Note: We would like to thank Christian Zimmermann and Dennis Heffley for comments that lead to improvements in this paper. Any errors are ours alone.
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More information through EDIRC
Risky Consumption; Health care Cost; Insurance Premia Pricing; Two Sector Model; Obesity.;
Find related papers by JEL classification:
- I19 - Health, Education, and Welfare - - Health - - - Other
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-23 (All new papers)
- NEP-CMP-2010-01-23 (Computational Economics)
- NEP-DGE-2010-01-23 (Dynamic General Equilibrium)
- NEP-HEA-2010-01-23 (Health Economics)
- NEP-IAS-2010-01-23 (Insurance Economics)
- NEP-MIC-2010-01-23 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
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- Jay Bhattacharya & Neeraj Sood, 2005. "Health Insurance and the Obesity Externality," NBER Working Papers 11529, National Bureau of Economic Research, Inc.
- Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1133-1165, November.
- Botond Koszegi & Matthew Rabin, 2009. "Reference-Dependent Consumption Plans," American Economic Review, American Economic Association, vol. 99(3), pages 909-36, June.
- Botond Koszegi & Matthew Rabin, 2007. "Reference-Dependent Risk Attitudes," American Economic Review, American Economic Association, vol. 97(4), pages 1047-1073, September.
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