Optimal tax policy and expected longevity: a mean and variance utility approach
This paper studies the normative problem of redistribution between agents who can infuence their survival probability through private health spending, but who differ in their attitude towards the risks involved in the lotteries of life to be chosen. For that purpose, a two-period model is developed, where agents' preferences on lotteries of life can be represented by a mean and variance utility function allowing, unlike the expected utility form, some sensitivity to what Allais (1953) calls the dispersion of psychological values. It is shown that if agents ignore the impact of their health spending on the return of their savings, the decentralization of the first-best utilitarian optimum requires intergroup lump-sum transfers and group-specifc taxes on health spending. Under asymmetric information, we find that subsidizing health expenditures may be optimal as a way to solve the incentive problem.
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|Note:||In : International Tax and Public Finance, 16, 514-537, 2009|
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- Gary S. Becker & Tomas J. Philipson & Rodrigo R. Soares, 2005.
"The Quantity and Quality of Life and the Evolution of World Inequality,"
American Economic Review,
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- LEROUX, Marie-Louise, 2008. "Endogenous differential mortality, non monitored effort and optimal non linear taxation," CORE Discussion Papers 2008029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Eytan Sheshinski, 2007. "The Economic Theory of Annuities," Economics Books, Princeton University Press, edition 1, number 8536.
- Broome, John, 2006. "Weighing Lives," OUP Catalogue, Oxford University Press, number 9780199297702, April.
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- Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
- Frederick Mosteller & Philip Nogee, 1951. "An Experimental Measurement of Utility," Journal of Political Economy, University of Chicago Press, vol. 59, pages 371-371.
- Loomes, Graham & Sugden, Robert, 1987. "Some implications of a more general form of regret theory," Journal of Economic Theory, Elsevier, vol. 41(2), pages 270-287, April. Full references (including those not matched with items on IDEAS)
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