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A. Fürnkranz-Prskawetz:
"Externalities in a Life-Cycle Model with Endogenous Survival";
Talk: CORE - ECORE, Economic Theory Seminar, Belgien, Université catholique de Louvain (invited); 2010-03-29.

We study socially vs individually optimal life-cycle allocations of consumption and health care, when individual health expenditure 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 expenditure and the transfer rate are derived. Numerical analysis illustrates the workings of our model.

demand for health, externality, life-cycle-model, optimal control, tax-subsidy, value of life.