Instituto de Economía

Abstract: We study optimal human and health linear policies when there is a paternalistic motive to overcome present bias problems of agents with heterogeneous cognitive skills. The paternalistic intervention rewards individuals for physical capital accumulation and the combined effect of health and human capital on future earnings. Our results highlight a novel effect of paternalistic policies due to the interaction between present-biased preferences and cognitive skills. We illustrate numerically that this policy package is the most effective and we analyze the relevance of agent’s cognitive skills and present-biased preferences for the determination of first-best and constrained first-best optimal policies.