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Optimal tax policy and expected longevity: a mean and variance utility approach

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Leroux, Marie-Louise [UCL]

This paper studies the normative problem of redistribution between agents who can influence their survival probability through private health spending, but who differ in their attitude towards the risks involved in the lotteries of life to be chosen. For that purpose, a two-period model is developed, where agents' preferences on lotteries of life can be represented by a mean and variance utility function allowing, unlike the expected utility form, some sensitivity to what Allais (Econometrica 21(4), 503-546, 1953) calls the 'dispersion of psychological values'. It is shown that if agents ignore the impact of health spending on the return of their savings, the decentralization of the first-best utilitarian optimum requires intergroup lump sum transfers and group-specific positive taxes on health spending. Under asymmetric information, a differentiated taxation across agents is still required, but subsidizing health spending may be optimal as a way to solve the incentive problem.

Document type Article de périodique (Journal article)
Publication date 2009
Language Anglais
Journal information "International Tax and Public Finance" - Vol. 16, no. 4, p. 514-537 (Août 2009)
Peer reviewed yes
Publisher Springer
issn 0927-5940
e-issn 1573-6970
Publication status Publié
Affiliation UCL - EUEN/CORE - Center for operations research and econometrics
Keywords Longevity ; Risk ; Lotteries of life ; Non-expected utility theory ; Moments of utility theory ; Disappointment ; Health spending
Links
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Bibliographic reference Leroux, Marie-Louise. Optimal tax policy and expected longevity: a mean and variance utility approach. In: International Tax and Public Finance, Vol. 16, no. 4, p. 514-537 (Août 2009)
Permanent URL http://hdl.handle.net/2078.1/28501