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On the Optimal Distribution of Health Care Spending

Roozbeh Hosseini, Larry Jones and Laurence Ales
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Roozbeh Hosseini: Arizona State University

No 1111, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: How should society allocate health-care resources across individuals? In what ways is the current allocation of health-care inefficient? In this paper we study a model in which health status affects probability of survival and individuals are heterogeneous with respect to their labor productivity. We characterize the ex-ante efficient allocation with full information in this environment and show that heterogeneity in labor productivity introduces heterogeneity in level of health-care investment across individuals. More productive individuals should be healthier in order to survive longer and continue to contribute to output. This is socially optimal even if it is followed by complete redistribution of consumption resources. We compare the optimal allocation with what is observed in Medical Expenditure Panel Survey (MEPS). Although it is efficient to induce inequality in health-care expenditure, we find that the amount of health care inequality observed in the data is orders of magnitudes larger than what is implied by ex ante efficiency in our benchmark environment.

Date: 2011
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Working Paper: On the Optimal Distribution of Health Care Spending (2010)
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