Externalities in a life cycle model with endogenous survival (Q2427864)

The authors propose a life-cycle model in continuous time to study the optimal patterns of consumption and health care, where it is assumed that health care curbs the individual's own mortality and also induces a spill over effect on other persons' survival. The authors analyze the inefficiencies in individual behavior and the effects of externalities on them by comparing the patterns of consumption and health care of two variants of the model with endogenous mortality: {\parindent=6mm \begin{itemize}\item[(i)] a social planner maximizes welfare at population level, determining the socially optimal pattern of consumption and health expenditure and \item[(ii)] an individual maximizes its own life time utility without altruistic concerns, determining the optimal individual pattern of consumption and health expenditure. \end{itemize}} Furthermore, they derive the optimal transfer scheme that fully internalizes the spill-over and induces the individual to allocate consumption and health care over her life cycle at socially efficient levels. The model is solved theoretically and with the help of numerical simulations, the authors illustrate the asymmetry between positive and negative spillovers.