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Optimal paternalistic health and human capital subsidy

Marcelo Arbex () and Enlinson Mattos ()

Economics Letters, 2019, vol. 176, issue C, 39-42

Abstract: We characterize the first-best earnings subsidy when agents are heterogeneous with respect to present-biased preferences and cognitive skills. When agents’ health and human capital biased allocations affect not only welfare but also their labor earnings, a single subsidy corrects for agents’ mistaken decisions. We highlight two novel features of paternalistic interventions: the effects of agents’ decisions on the economy’s supply side, through future productivity, and the role of cognitive skills on individual’s optimal trade-off between human capital accumulation and leisure. We compare this optimal subsidy to an alternative policy package.

Keywords: Paternalism; Optimal taxation; Education; Health (search for similar items in EconPapers)
JEL-codes: D61 D91 H21 I18 I28 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:ecolet:v:176:y:2019:i:c:p:39-42