Optimal choice of health and retirement in a life-cycle model

Kuhn M, Wrzaczek S, Prskawetz A, & Feichtinger G (2015). Optimal choice of health and retirement in a life-cycle model. Journal of Economic Theory 158: 186-212. DOI:10.1016/j.jet.2015.04.006.

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Abstract

We examine within a life-cycle model the simultaneous choice of health care and retirement (together with consumption). Health tends to have an impact on retirement through morbidity, determining earnings and the disutility of work, and through longevity, determining the need to accumulate retirement wealth. Conversely, the age of retirement drives the demand for health care through the value of survival and the value of morbidity reductions. We characterise the optimal relationship between health expenditure and retirement and apply our model to analyse the effects of moral hazard in the annuity market. While moral hazard always induces excessive health investments and an excessive duration of working life, it also triggers an excessive level of consumption if the impact of health on the disutility of work is sufficiently large. We examine a transfer scheme and mandatory retirement as poicies towards curtailing moral hazard. Numerical analysis illustrates the role of moral hazard in shaping the life-cycle allocation.

Item Type: Article
Uncontrolled Keywords: health; life-cycle model; moral hazard; retirement; value of life
Research Programs: World Population (POP)
Bibliographic Reference: Journal of Economic Theory; 158:186-212 (July 2015)
Depositing User: IIASA Import
Date Deposited: 15 Jan 2016 08:53
Last Modified: 17 Feb 2016 16:28
URI: http://pure.iiasa.ac.at/11448

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