Health, survival and consumption over the life cycle: individual versus social optimum and the role of externalities
Rostock Center discussion paper 16
Rostock, Rostock Center for the Study of Demographic Change (2007)
This paper offers a framework that allows to compare the life-cycle alloca-
tion of consumption and health care that a social planner would choose when
maximising the 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. We derive the social versus private value of life and discuss how they can be used to identify inefficiencies in individual choice. The model is applied 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 show how individual incentives can be aligned with the planner’s by way of an optimal transfer scheme. Numerical analysis illustrates the workings of our model.