Optimal Health Prevention and Savings: How to deal with Fatalism?

In this paper, we analyze the determinants of primary prevention and the social optimum. First, we analyze optimal decisions on primary prevention and savings when individuals face a health risk involving expenses that can not be covered by any insurance (private or public). To manage health risks, individuals have two possibilities: invest in primary prevention, in order to reduce the probability of the disease and/or save, in order to face the costs of the disease that are not covered by insurance. We show that the impact of wealth and interest rates on prevention and savings decisions strongly depends on the perceived substituability between health and wealth. Moreover, agents have their own risk perceptions which in uence their decisions. In the second part of the paper, as prevention generates externalities, individuals' optimal levels of prevention are lower than the socially optimal ones. In this context, we analyze the social optimum and its decentralization by tax- financed government subsidies on prevention expenses.