Health, Survival and Consumption over the Life Cycle: Individual versus Social Optimum and the Role of Externalities

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 27.09.2007, 12:15 - 13:30


Presentation by 

Alexia Fürnkranz-Prskawetz (Vienna Institute of Demography)


This paper offers a framework that allows to compare the allocation of resources to consumption and health care that a social planner would choose when maximising the social welfare of an age-structured population with the allocation that individuals would choose when maximising their own life-time utility. By curbing mortality health care spending affects individual life expectancy and population size. Applying the concept of the willingness to pay for mortality reductions, we derive the social versus private value of life. We apply the model to study the effects of spillovers, where individual mortality is not only affected by individual health care expenditure but also by aggregate expenditure, e.g. due to learning-by-doing effects (positive) or due to congestion (negative). We derive the value of the externality and study how individual incentives can be aligned with the planner’s by way of an optimal transfer scheme. We illustrate the workings of our model by way of a numerical analysis.

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