Evaluating Health Care Externality Costs Generated by Risky Consuption 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 speci cation 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 strati ed 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 e ects 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 Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy in its series Food Marketing Policy Center Research Reports with number 121.
Length: 30 pages
Date of creation: Dec 2009
Date of revision:
Risky Consumption; Health Care Costs; Insurance Premia Pricing; Two Sector Economy; Obesity;
Other versions of this item:
- Michael A. Cohen & Marina-Selini Katsaiti, 2009. "Evaluating Health Care Externality Costs Generated by Risky Consumption Goods," Working papers 2009-43, University of Connecticut, Department of Economics.
- Cohen, Michael & Katsaiti, Marina-Selini, 2009. "Evaluating Health Care Externality Costs Generated by Risky Consuption Goods," Research Reports 149964, University of Connecticut, Food Marketing Policy Center.
- I19 - Health, Education, and Welfare - - Health - - - Other
- E21 - Macroeconomics and Monetary Economics - - 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
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