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Growth and Welfare under Endogenous Lifetime

Bath Economics Research Papers No. 47/16

71 Pages Posted: 11 Jul 2010 Last revised: 7 Mar 2016

Maik T. Schneider

University of Bath

Ralph Winkler

University of Bern - Department of Economics; University of Bern - Oeschger Centre for Climate Change Research

Multiple version iconThere are 2 versions of this paper

Date Written: February 2016

Abstract

We study the role of endogenous healthcare choices by households to extend their expected lifetimes on economic growth and welfare in a decentralized overlapping generations economy with the realistic feature that households' savings are held in annuities. We characterize healthcare spending in the decentralized market equilibrium and its effects on economic growth. We then identify the moral-hazard effect in healthcare investments when annuity rates are conditioned on average mortality and explain the conditions under which it will lead to over-investment in healthcare. Moreover, we specify the general equilibrium effects and macroeconomic repercussions associated with this moral-hazard effect. Calibrating our model to OECD data, we find that the moral-hazard effect may be substantial and implies sizeable welfare losses of approximately 1.5%. At a more general level, our study suggests that welfare improvements from longevity increases may be quite lower than sometimes assumed when considered in planner economies.

Keywords: annuities, economic growth, endogenous longevity, healthcare expenditures, healthcare technology, moral hazard, pension systems, welfare analysis

JEL Classification: O40, I10, J10

Suggested Citation

Schneider, Maik T. and Winkler, Ralph, Growth and Welfare under Endogenous Lifetime (February 2016). Bath Economics Research Papers No. 47/16. Available at SSRN: https://ssrn.com/abstract=1636855 or http://dx.doi.org/10.2139/ssrn.1636855

Maik T. Schneider (Contact Author)

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Ralph Winkler

University of Bern - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, 3001
Switzerland
+41 31 631 4508 (Phone)

HOME PAGE: http://www.ralph-winkler.de

University of Bern - Oeschger Centre for Climate Change Research ( email )

Zähringerstrasse 25
Bern, 3012
Switzerland

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