Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 813: Present-Biased Preferences and Publicly Provided Health Care

Thomas Aronsson () and David Granlund ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
David Granlund: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

Abstract: In this paper, we analyze the welfare effects of publicly provided health care in an economy where the consumers have "present-biased" preferences due to quasi-hyperbolic discounting. The analysis is based on a two-type model with asymmetric information between the government and the private sector, and each consumer lives for three periods. We present formal conditions under which public provision to the young and middle-aged generation, respectively, leads to higher welfare. Our results show that quasi-hyperbolic discounting provides a strong incentive for public provision to the young generation; especially if the consumers are naive (instead of sophisticated).

Keywords: Public provision of private goods; hyperbolic discounting; intertemporal model; asymmetric information

JEL-codes: D03; D61; H42

36 pages, September 17, 2010

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