Broad area of research interests: Macroeconomic Theory

Economics

Speaker:Pr. Julio Davilla, Centre d' Economie de la Sorbonne (CNRS)
Date: Wednesday 10 February 2010
Time: 16.15
Location: Streatham Court - Lecture Theatre D

Further details

In an overlapping generations economy setup we show that, if individuals can improve their life expectancy at some cost either in terms of resources or in terms of utility then the laissez-faire competitive equilibrium steady state differs from the first-best steady state. This is due to the fact that under perfect competition individuals fail to anticipate the impact of their longevity-enhancing efforts on the returns to their annuitized savings. More specifically, at the competitive equilibrium steady state the individuals exert too much effort to increase their life expectancy and they consume too little, compared to the first-best steady state. We identify policies implementing the first-best steady state as a competitive equilibrium and show that it is not always necessary to resort to the taxation of health expenditures (if any), the announcement of a (possibly zero) lump-sum tax contingent to survival rates (and hence, indirectly, to individuals efforts) suffices to achieve the first-best. Interestingly enough the tax takes the value zero at the steady state.