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Competitive Markets With Endogenous Health Risks

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  • Alberto Bennardo
  • Salvatore Piccolo

Abstract

We study an economy where agents' productivity and labor endowment depend on their health status, and indivisible occupational choices affect individual health distributions. We show that Pareto efficiency requires cross-transfers across occupations. Moreover, workers with relatively less safe jobs must get positive transfers whenever labor supply is not very reactive to wages, a condition in line with the findings of a large empirical literature. In these instances, compensating wage differentials equalizing the utilities of ex-ante identical workers in different jobs undermine ex-ante efficiency. Moreover, competitive equilibria where only assets with deterministic payoffs are traded are not first-best. Finally, we show that simple transfer schemes, implemented through linear subsidies to health insurance, enhance efficiency.

Suggested Citation

  • Alberto Bennardo & Salvatore Piccolo, 2014. "Competitive Markets With Endogenous Health Risks," Journal of the European Economic Association, European Economic Association, vol. 12(3), pages 755-790, June.
    • Handle: RePEc:bla:jeurec:v:12:y:2014:i:3:p:755-790
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    File URL: http://hdl.handle.net/10.1111/jeea.12078
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    Cited by:

    1. is not listed on IDEAS
    2. Gianluigi Coppola, 2012. "Health, Lifestyle and Growth," AIEL Series in Labour Economics, in: Giuliana Parodi & Dario Sciulli (ed.), Social Exclusion, chapter 0, pages 17-34, Springer.

    More about this item

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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