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Externalities in a Life-Cycle Model with Endogenous Survival

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

Abstract

We study socially vs. individually optimal lifecycle allocations of consumption and health care, when individual health expenditure curbs own mortality but also has a spillover effect on other persons' survival. Such spillovers arise, for instance, when health care activity at aggregate level triggers improvements in treatment through learningbydoing (positive externality) or a deterioration in the quality of care through congestion (negative externality). We combine an agestructured optimal control model at population level with a conventional lifecycle model to derive the social and private value of life. We then examine how individual incentives deviate from social incentives and how they can be aligned by way of a transfer scheme. The agepatterns of socially and individually optimal health expenditure and the transfer rate are derived. Numerical analysis illustrates the workings of our model.

Suggested Citation

  • Michael Kuhn & Stefan Wrzaczek & Alexia Prskawetz & Gustav Feichtinger, 2010. "Externalities in a Life-Cycle Model with Endogenous Survival," VID Working Papers 1001, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
  • Handle: RePEc:vid:wpaper:1001
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    Cited by:

    1. Frankovic, Ivan & Kuhn, Michael, 2018. "Health insurance, endogenous medical progress, and health expenditure growth," ECON WPS - Working Papers in Economic Theory and Policy 01/2018, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.
    2. Holger Strulik & Klaus Prettner & Alexia Prskawetz, 2010. "R&D-Based Growth in the Post-Modern Era," VID Working Papers 1009, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
    3. Ivan Frankovic & Michael Kuhn & Stefan Wrzaczek, 2020. "On the Anatomy of Medical Progress Within an Overlapping Generations Economy," De Economist, Springer, vol. 168(2), pages 215-257, June.
    4. Grafeneder-Weissteiner, Theresa & Prettner, Klaus, 2010. "Agglomeration processes in aging societies," Department of Economics Working Paper Series 131, WU Vienna University of Economics and Business.
    5. Klaus Prettner & Alexia Prskawetz, 2010. "Demographic change in models of endogenous economic growth. A survey," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 18(4), pages 593-608, December.
    6. Michael Kuhn & Alexia Prskawetz & Uwe Sunde, 2014. "Health, education, and retirement over the prolonged life cycle: a selective survey of recent research," Vienna Yearbook of Population Research, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna, vol. 12(1), pages 1-22.
    7. Bloom, David E. & Kuhn, Michael & Prettner, Klaus, 2020. "Modern Infectious Diseases: Macroeconomic Impacts and Policy Responses," IZA Discussion Papers 13625, Institute of Labor Economics (IZA).
    8. Kuhn, Michael & Frankovic, Ivan & Wrzaczek, Stefan, 2017. "Medical Progress, Demand for Health Care, and Economic Performance," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168249, Verein für Socialpolitik / German Economic Association.
    9. Wrzaczek, Stefan & Kuhn, Michael & Prskawetz, Alexia & Feichtinger, Gustav, 2010. "The reproductive value in distributed optimal control models," Theoretical Population Biology, Elsevier, vol. 77(3), pages 164-170.
    10. Hintermann, Beat & Minke, Matthias, 2018. "The value of extending life at its end: Health care allocation in the presence of learning spillovers," Working papers 2018/15, Faculty of Business and Economics - University of Basel.
    11. Stelter, Robert, 2014. "Over-aging - Are present human populations too old?," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100334, Verein für Socialpolitik / German Economic Association.
    12. Frankovic, Ivan & Kuhn, Michael & Wrzaczek, Stefan, 2016. "Medical care within an OLG economy with realistic demography," ECON WPS - Working Papers in Economic Theory and Policy 02/2016, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.
    13. Kuhn, Michael & Wrzaczek, Stefan & Prskawetz, Alexia & Feichtinger, Gustav, 2015. "Optimal choice of health and retirement in a life-cycle model," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 186-212.
    14. Stefan Wrzaczek & Michael Kuhn & Ivan Frankovic, 2020. "Using Age Structure for a Multi-stage Optimal Control Model with Random Switching Time," Journal of Optimization Theory and Applications, Springer, vol. 184(3), pages 1065-1082, March.
    15. Thomas Fent & Belinda Aparicio Diaz & Alexia Prskawetz, 2013. "Family policies in the context of low fertility and social structure," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 29(37), pages 963-998.
    16. Bilal Barakat & Johannes Holler & Klaus Prettner & Julia Schuster, 2010. "The Impact of the Economic Crisis on Labour and Education in Europe," VID Working Papers 1006, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
    17. Stelter, Robert, 2016. "Over-aging — Are present-day human populations too old?," Mathematical Social Sciences, Elsevier, vol. 82(C), pages 116-143.
    18. Ivan Frankovic & Michael Kuhn & Stefan Wrzaczek, 2020. "On the Anatomy of Medical Progress Within an Overlapping Generations Economy," De Economist, Springer, vol. 168(2), pages 215-257, June.

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    Keywords

    Demand for health; externality; life-cycle-model; optimal control; tax-subsidy; value of life.;
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