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Optimal choice of health and retirement in a life-cycle model

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  • Kuhn, Michael
  • Wrzaczek, Stefan
  • Prskawetz, Alexia
  • Feichtinger, Gustav

Abstract

We examine within a life-cycle set-up the simultaneous choice of health care and retirement (together with consumption), when health care contributes to both a reduction in mortality and in morbidity. Health tends to impact on retirement via morbidity, determining the disutility of work, and through longevity, determining the need to accumulate retirement wealth. In contrast, the age of retirement drives health through changes in the value of survival and the value of morbidity reductions. We apply our model to analyse the effects of moral hazard in the annuity market: While moral hazard always induces excessive health investments and an excessive duration of working life it also triggers an excessive level of consumption if the impact of health on the disutility of work is sufficiently large. We examine a transfer scheme and mandatory retirement as policies to curtail moral hazard. Numerical analysis illustrates the working of our model. --

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Paper provided by Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON) in its series ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy with number 01/2012.

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Date of creation: 2012
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Handle: RePEc:zbw:tuweco:012012

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Web page: http://www.econ.tuwien.ac.at/
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Keywords: annuities; demand for health; moral hazard; life-cycle-model; optimal control; retirement; value of life;

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Cited by:
  1. Klaus Prettner & David Canning, 2012. "Increasing life expectancy and optimal retirement:does population aging necessarily undermine economic prosperity?," PGDA Working Papers 9112, Program on the Global Demography of Aging.
  2. Carl-Johan Dalgaard & Holger Strulik, 2012. "The Genesis of the Golden Age - Accounting for the Rise in Health and Leisure," Discussion Papers 12-10, University of Copenhagen. Department of Economics.

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