Optimal Paternalistic Health and Human Capital Policies

We study optimal human and health linear policies when there is a paternalistic motive to overcome present bias problems of agents with heterogeneous cognitive skills. The paternalistic intervention is meant to reward individuals for physical capital accumulation and the combined effect of health and human capital on future earnings. Our results highlight a novel effect of paternalistic policies due to the interaction between present-biased preferences and cognitive skills. We show that a single policy on the agent's earnings captures all the corrections that would be required if the planner were to implement other policy instruments, for instance, subsidies targeting human and health capital separately or current biased decisions. A numerical exercise illustrates that this policy package is the most effective, requiring lower tax revenues to correct for present bias and agents misperception of their own cognitive skills problems. We analyze the relevance of agent's cognitive skills and present-biased preferences for the determination of first-best and constrained first-best optimal policies.t technologies. Welfare is higher if consumer auditing is the only tax enforcement policy.