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Endogenous Lifetime in an Overlapping-Generations Small Open Economy

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  • Luciano Fanti
  • Luca Gori

Abstract

Using an overlapping-generations small open economy with endogenous lifetime a la Chakraborty (2004), we show that an increase in public investments in health is beneficial to life expectancy but can actually reduce both saving and domestic income per worker. Moreover, using the notion of A-efficiency introduced by Golosov et al. (2007) in a context of endogenous population (i.e., Pareto efficiency applied to people alive in every state), which contrasts with the P-efficiency criterion with respect to which the preference profiles of both born and unborn agents are evaluated in every state, some normative conclusions can be drawn: although the financing of health investments reduces both the disposable income and marginal propensity to consume of young individuals through increased labor income taxation, it also increases the length of life and can represent an A-Pareto improvement when the world interest rate is sufficiently high, because consumption when old becomes more attractive in such a case. Indeed, there exist: (i) a whole range of health tax rates that can effectively be used to increase social welfare, and (ii) an A-Pareto-efficient allocation. Moreover, the numerical simulations presented for some actual small open economies reveal that raising public health spending above the existing level causes both saving and domestic income to fall in all countries, while also finding that developed and underdeveloped (transition) economies are currently underinvesting (overinvesting) in health.

Suggested Citation

  • Luciano Fanti & Luca Gori, 2012. "Endogenous Lifetime in an Overlapping-Generations Small Open Economy," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(2), pages 121-152, June.
  • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201206)68:2_121:eliaos_2.0.tx_2-8
    DOI: 10.1628/001522108X639945
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    Cited by:

    1. Luciano Fanti & Luca Gori & Fabio Tramontana, 2014. "Endogenous lifetime, accidental bequests and economic growth," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 37(1), pages 81-98, April.
    2. Luciano Fanti & Luca Gori, 2014. "Endogenous fertility, endogenous lifetime and economic growth: the role of child policies," Journal of Population Economics, Springer;European Society for Population Economics, vol. 27(2), pages 529-564, April.
    3. Luciano Fanti & Luca Gori, 2012. "Public Expenditure on Health and Private Old-Age Insurance in an OLG Growth Model with Endogenous Fertility: Chaotic Dynamics Under Perfect Foresight," Computational Economics, Springer;Society for Computational Economics, vol. 40(4), pages 333-353, December.

    More about this item

    Keywords

    A-efficiency; health spending; life expectancy; OLG model; small open economy;

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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