A Theory of Lifetime Welfare: Cycles, Trend, Span, and Policies

Abstract

This article presents a theory of lifetime welfare, considering the corresponding cycles, trend, and span. The model suggests that economic agents should focus more on improving, smoothing, and stabilizing the welfare trend of individuals, than on improving, smoothing, and stabilizing their consumption and income, since they are not the same. Given that private and public decisions can generate internalities and externalities, and thus, inefficiencies, these results can justify individual, social, and government interventions, for example in lifestyle, and the education, health, pension, and insurance markets. It is argued that this approach can be a complement to the worldwide efforts to improve the coverage and sustainability of the health and pension systems; help explain the so-called Easterlin paradox, and contribute to the wellness set point debate in psychology.

Keywords: lifetime welfare, individual welfare trend curve, welfare smoothing, marginal rate of welfare trend change, social welfare trends function and frontier, Easterlin paradox

JEL Classification: D11, D60, D62, D70