Growth and Welfare under Endogenous Lifetimes*

Abstract

We study the role of endogenous healthcare choices by households to extend their expected lifetimes on economic growth and welfare in a decentralized overlapping generations economy with annuitized wealth. We characterize endogenous healthcare spending in the decentralized market equilibrium and its effects on economic growth, and we identify the moral-hazard effect in healthcare investments when annuity rates are conditioned on average mortality. In a numerical simulation of our model with OECD data from 2005, we find that the moral-hazard effect can be substantial and implies sizable welfare losses of approximately 1.4–2.8 percent, depending on the share of annuitized retirement wealth.