Growth and Welfare Under Endogenous Lifetime

72 Pages Posted: 27 Mar 2017

See all articles by Maik T. Schneider

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: March 01, 2017

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 identify the moral-hazard effect in healthcare investments when annuity rates are conditioned on average mortality and explain the conditions under which this leads to over-investment in healthcare. Moreover, we specify the general equilibrium effects and macroeconomic repercussions associated with this moral-hazard effect. In a numerical simulation of our model with 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 lower than suggested when considered in planner economies.

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

JEL Classification: O400, I100, J100

Suggested Citation

Schneider, Maik T. and Winkler, Ralph, Growth and Welfare Under Endogenous Lifetime (March 01, 2017). CESifo Working Paper Series No. 6367. Available at SSRN: https://ssrn.com/abstract=2941389

Maik T. Schneider

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Ralph Winkler (Contact Author)

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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