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On optimal subsidies for prevention and long-term care

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  • Pablo Garcia Sanchez
  • Luca Marchiori
  • Olivier Pierrard

Abstract

We propose a two-period overlapping generation economy that incorporates health investment in preventive measures during youth. These preventive measures contribute to increased longevity and reduced frailty, which influence old-age care costs. As these costs are funded through pay-as-you-go social security contributions, investment in prevention creates externalities for the next generation. We analytically determine the optimal level of prevention and characterize the optimal health policy that a government should implement to achieve it. Our findings reveal that the optimal subsidy to healthcare exceeds the optimal subsidy to preventive measures. Furthermore, both subsidies are inversely related to the generosity of the public pension scheme. We explore the robustness of our results through various extensions and demonstrate their consistency with several patterns observed in cross-country OECD data.

Suggested Citation

  • Pablo Garcia Sanchez & Luca Marchiori & Olivier Pierrard, 2024. "On optimal subsidies for prevention and long-term care," BCL working papers 186, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp186
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Health; Prevention; Optimal Ramsey policy; Overlapping generations;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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