The Macroeconomic Effects of Endogenous Life Expectancy

UoM administered thesis: Unknown

  • Authors:
  • Panagiotis Margaris

Abstract

This thesis provides three general equilibrium overlapping generations models to analyze the macroeconomic effects of endogenous life expectancy. I find that endogenous life ex- pectancy has substantial effects on the effective discount rate, the demographic structure of the economy and productivity through the health channel, which subsquently affect human and physical capital accumulation, welfare and fiscal policy. In Chapter 1, I study the presence and magnitude of macroeconomic externalities associated with obesity. I argue that focusing solely on the economic costs on health care spending ig- nores the effects of obesity on net social security benefits caused by higher mortality among obese individuals. To estimate the size of this externality, I develop an overlapping gen- erations model with rational choice with respect to food consumption and weight as in Lakdawalla and Philipson (2009), endogeneizing life expectancy, labour productivity and health care costs. The life-time net contributions of the top 30% of the BMI distribution are negative but quantitatively small, despite the fact that the model generates substantial wealth and income inequality, consistent with the observed socioeconomic gradient of obe- sity (Baum and Ruhm, 2009), which results in lower lifetime contributions. Furthermore, I perform two policy experiments (i) eliminating childhood obesity and (ii) eliminating the VAT exemption of food consumption, both resulting in significant welfare gains, with the former eliminating the obesity externality. In Chapter 2, I study the effects of health on optimal taxation, where health affects the level of utility, the probability of survival and productivity. The results suggest that health affects optimal taxation in the Ramsey problem via three channels. First, since health is a stock that naturally deteriorates over time, the optimal level of taxation of medical spending is not constant over the life-cycle. Second, the productivity-enhancing aspect of health affects labour supply decisions over the life-cycle, where it is optimal for the government to use age-dependent labour income taxes to minimize distortions in the labour market. If the government cannot condition health care spending and labour income taxes on age, then a non-zero capital income tax can be implemented to achieve the optimal allocation. Finally, productivity growth in the medical sector which directly or indirectly affects longevity has a heterogeneous effect on each cohort, which in the absence of age-dependent taxation creates an evolutionary path of the optimal capital income taxation. In Chapter 3, I examine the macroeconomic effects of an increase in the retirement age as a response to an ageing population and deteriorating dependency ratios. An increase in retirement age induces agents to increase medical spending. Households invest in their level of health in order to be fit to work for longer, since older agents that are affected by the retirement age reform have a lower level of health and increased working hours lost due to illness. Furthermore, the higher level of health raises life expectancy, partially offsetting the effects of the retirement age reform with respect to dependency ratios.

Details

Original languageEnglish
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Award date1 Aug 2018