title: Externalities in a life cycle model with endogenous survival.
abstract: We study socially vs individually optimal life cycle allocations of consumption and health, when individual health care 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 learning-by-doing (positive externality) or a deterioration in the quality of care through congestion (negative externality). We combine an age-structured optimal control model at population level with a conventional life cycle 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 age-patterns of socially and individually optimal health expenditures and the transfer rate are derived. Numerical analysis illustrates the working of our model.
authors.affiliation: Austrian Academy of Science, Vienna Institute of Demography/Wittgenstein Centre, Wohllebengasse 12-14, A-1040 Vienna, Austria.
authors.forename: Michael
authors.initials: M
authors.lastname: Kuhn
authors.affiliation: Institute of Mathematical Methods in Economics (Research Group on Operations Research and Control Systems), Vienna University of Technology, Argentinierstrasse 8, 1040 Vienna, Austria; Austrian Academy of Science, Vienna Institute of Demography/Wittgenstein Centre, Wohllebengasse 12-14, A-1040 Vienna, Austria.
authors.forename: Stefan
authors.initials: S
authors.lastname: Wrzaczek
authors.affiliation: Institute for Mathematical Methods in Economics (Research Group on Economics), Vienna University of Technology, Argentinierstrasse 8, 1040 Vienna, Austria; Austrian Academy of Science, Vienna Institute of Demography/Wittgenstein Centre, Wohllebengasse 12-14, A-1040 Vienna, Austria.
authors.forename: Alexia
authors.initials: A
authors.lastname: Prskawetz
authors.affiliation: Institute of Mathematical Methods in Economics (Research Group on Operations Research and Control Systems), Vienna University of Technology, Argentinierstrasse 8, 1040 Vienna, Austria; Austrian Academy of Science, Vienna Institute of Demography/Wittgenstein Centre, Wohllebengasse 12-14, A-1040 Vienna, Austria.
authors.forename: Gustav
authors.initials: G
authors.lastname: Feichtinger
keywords: Demand for health; Externality; Life cycle-model; Optimal control; Tax–subsidy; Value of life