DP5385 Competitive Markets with Endogenous Health Risks

Author(s): Alberto Bennardo, Salvatore Piccolo
Publication Date: December 2005
Keyword(s): compensating wage differentials, competitive markets, individual health risks, Pareto efficiency
JEL(s): D5, D61, D80, I18
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5385

We study a general equilibrium model where agents' preferences, productivity and labour endowments depend on their health status, and occupational choices affect individual health distributions. Efficiency typically requires agents of the same type to obtain different expected utilities if assigned to different occupations. Under mild assumptions, workers with riskier jobs must get higher expected utilities if health aspects production capabilities. The same holds if health aspects preferences and health enhancing consumption activities are sufficiently effective, so that income and health are substitutes. The converse obtains when health aspects preferences, but health enhancing consumption activities are not very effective, and hence income and health are complements. Competitive equilibria are first- best if lottery contracts are enforceable, but typically not if only assets with deterministic payoffs are traded. Compensating wage differentials which equalize the utilities of workers in different jobs are incompatible with ex-ante efficiency. Finally, absent asymmetric information, there exist deterministic cross-jobs transfers leading to ex-ante efficiency.