Growth and Welfare under Endogenous Lifetime

Maik Schneider, Ralph Winkler

Research output: Working paper

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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 willlead 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.
Original languageEnglish
Place of PublicationBath, U. K.
PublisherDepartment of Economics, University of Bath
Publication statusPublished - Feb 2016

Publication series

NameBath Economics Research Papers
No.47/16

Keywords

  • annuities
  • Economic growth
  • endogenous longevity
  • healthcare expenditures
  • moral hazard
  • pension systems

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  • Projects

    Economic Growth in Aging Societies

    Schneider, M. & Winkler, R.

    1/07/14 → …

    Project: Other

    Cite this

    Schneider, M., & Winkler, R. (2016). Growth and Welfare under Endogenous Lifetime. (Bath Economics Research Papers; No. 47/16). Department of Economics, University of Bath.