Competitive Markets with Endogenous Health Risks

Alberto Bennardo () and Salvatore Piccolo ()

No 5385, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: D5 D61 D80 I18 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-upt
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Related works:
Journal Article: COMPETITIVE MARKETS WITH ENDOGENOUS HEALTH RISKS (2014)
Working Paper: Competitive Markets with Endogenous Health Risks (2008)
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