Andersen, Torben M; Bhattacharya, Joydeep

WP #12018, September 2012

In this paper, we assume away standard distributional and static-efficiency arguments for public health, and instead, seek a dynamic efficiency rationale. We study a lifecycle model wherein young agents make health investments to reduce mortality risk. We identify a welfare rationale for public health under dynamic efficiency and exogenous mortalityeven when private and public investments are perfect substitutes. If health investment reduces mortality risk but individuals do not internalize its effect on the life-annuity interest rate, the Philipson-Becker effect emerges; when the young are net borrowers, it works together with dynamic efficiency to support a role for public health.

JEL Classification: E21, H3, I18

Keywords: public health, moral hazard, overlapping generations, mortality risk

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