(No) time to be healthy: Optimal policy with time and monetary investments in health

Abstract

Time is often an important ingredient of a healthy lifestyle. Starting from this observation, this paper studies optimal public policy concerned with promoting healthy choices taking into account both monetary and time investments in health. Individuals tend to underestimate the importance of their health while making decisions, which makes their investments too low compared to the first‐best. While the decentralization of the first‐best requires personalized subsidies on both time and monetary investments, this may be problematic due to informational issues. In a second‐best world where individual productivities and time investments are publicly unobservable, whereas monetary investments are observable in an anonymous way, the paper considers a policy with a non‐linear income tax and a linear subsidy on monetary health investments. If there are no incentive concerns, all other things equal, monetary investments complementary (substitutable) to time investments should be subsidized more (less) than those independent of time use. The addition of incentive concerns demonstrates that optimal subsidization of monetary health investments is less straightforward than one might think. Overall, the time ingredient in the production of health does play a role in the optimal policy design, affecting not only the subsidy on monetary health investments but also the income taxation.