Competitive Markets with Endogenous Health Risks

45 Pages Posted: 28 Feb 2006

See all articles by Alberto Bennardo

Alberto Bennardo

University of Salerno - Centre for Studies in Economics and Finance (CSEF); University of California, Los Angeles (UCLA) - Department of Economics; Centre for Economic Policy Research (CEPR)

Salvatore Piccolo

University of Bergamo, Compass Lexecon and CSEF

Date Written: December 2005

Abstract

We study a general equilibrium model where agents' preferences, productivity and labour endowments depend on their health status, and occupational choices affect individual health distributions. Efficiency typically requires agents of the same type to obtain different expected utilities if assigned to different occupations. Under mild assumptions, workers with riskier jobs must get higher expected utilities if health aspects production capabilities. The same holds if health aspects preferences and health enhancing consumption activities are sufficiently effective, so that income and health are substitutes. The converse obtains when health aspects preferences, but health enhancing consumption activities are not very effective, and hence income and health are complements. Competitive equilibria are first-best if lottery contracts are enforceable, but typically not if only assets with deterministic payoffs are traded. Compensating wage differentials which equalize the utilities of workers in different jobs are incompatible with ex-ante efficiency. Finally, absent asymmetric information, there exist deterministic cross-jobs transfers leading to ex-ante efficiency.

Keywords: Compensating wage differentials, competitive markets, individual health risks, pareto efficiency

JEL Classification: D5, D61, D80, I18

Suggested Citation

Bennardo, Alberto and Piccolo, Salvatore, Competitive Markets with Endogenous Health Risks (December 2005). CEPR Discussion Paper No. 5385, Available at SSRN: https://ssrn.com/abstract=887389

Alberto Bennardo (Contact Author)

University of Salerno - Centre for Studies in Economics and Finance (CSEF) ( email )

84084 Fisciano, Salerno
Italy

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Salvatore Piccolo

University of Bergamo, Compass Lexecon and CSEF ( email )

via de caniana 2
24127
Bergamo, BG 24127
Italy

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