Social genetic insurance: A life-cycle perspective

Abstract

Temporal risk aversion can justify a social genetic insurance scheme, even in the absence of reclassification risk. I model individuals who take a genetic test in period 0 and may become ill in period 2. I show that redistributing from low-risk to high-risk individuals in period 1 can increase social welfare, even when the high-risk are not financially penalized. Temporally risk-averse individuals value reductions in the risk to their lifetime utility brought by illness, such as increased morbidity and mortality. A social insurance can achieve this by taxing the low-risk and subsidizing the high-risk. I calibrate a multi-period life-cycle model for breast cancer and Huntington’s disease and quantify the optimal redistribution. For these two conditions, which are rare, substantial transfers to the high-risk can be achieved with minimal taxation on the low-risk. Thus, the welfare of the high-risk is substantially improved with little impact on the low-risk.