Optimal tax policy and expected longevity: a mean and variance approach

Marie-Louise Leroux and Grégory Ponthiere

No 2008039, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper studies the normative problem of redistribution between agents who can influence their survival probability through private health spending, but who differ in their attitude towards the risks involved in the lotteries of life to be chosen. For that purpose, we develop a two-period model where agents's preferences on lotteries of life can be represented by a mean and variance utility function allowing, unlike the expected utility form, some – agent-specific – sensitivity to what Allais (1953) calls the 'dispersion of psychological values'. It is shown that if agents ignore the impact of their health expenditures on the return of their savings, the decentralization of the first-best optimum requires not only intergroup lump-sum transfers, but, also, group-specific taxes on health spending. Under asymmetric information, we find that a subsidy on savings is optimal, whereas group-specific taxes on health spending are of ambiguous signs.

Keywords: longevity; risk; lotteries of life; expected utility theory; health spending. (search for similar items in EconPapers)
JEL-codes: D81 H21 I12 I18 J18 (search for similar items in EconPapers)
Date: 2008-06-01
New Economics Papers: this item is included in nep-pub and nep-upt
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2008039

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