Je ne regrette rien? Present-Bias and Time-Inconsistent Health and Retirement Decisions

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The objective of the proposed research project is to investigate the impact of hyperbolic discounting and time-inconsistent life cycle choices on health behavior, health outcomes, and individual welfare when the length of life is finite and endogenous. The role of hyperbolic discounting for health behavior and longevity remained largely unexplored in life cycle models of endogenous health and longevity although the issue attracts great attention in empirical health economics as well as in the medical sciences. A common feature of the few available economic studies is that they ignore the fact that health behavior affects the length of life. We argue that, actually, a major motivation of abstaining from or reducing unhealthy behavior (such as overeating or smoking) is the consideration of the potential health deficits and diseases caused by the behavior and their impact on premature death. ``Smoking kills'' warns the advertisement on cigarette packages, accompanied with disgusting pictures of smoking induced health deficits. It is thus reasonable to assume that individuals know that smoking reduces their life expectancy and that the desire for a long life influences the consumption decision of unhealthy goods, as for example the plan to quit smoking. The challenge is to explain why the knowledge about health consequences is insufficiently taken into account in current choices and how policy could nudge individuals to healthier behavior, a longer life, and less regret of past decisions.In the proposed project we integrate time-inconsistent decision making into the health deficit model and investigate 3 phenomena that cannot be explained by standard health economic theory. 1) We investigate the retirement decision and build a theory that explains why individuals retire earlier than planned although they saved less for retirement than planned. The reason will be that they failed to stick to their health plans (consumed more unhealthy food than planned, failed to give up smoking etc) such that their health and remaining life expectancy deteriorated faster than planned. We investigate how policy can nudge individuals to stick to their health and retirement plans. 2) We re-assess the economic theory of addiction when life length is finite and endogenous and decisions are time-inconsistent. We develop a theory that explains why individuals regret their addiction but are unable to escape addiction and discuss policies that prevent the development of addictions and help individuals to overcome addictions. 3) We develop a new theory why individuals invest too little in preventive health care (such as cancer screening or vaccination) and regret their behavior after they contracted a disease. We discuss policies that nudge individuals towards welfare maximizing demand of preventive health care.