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Schwardmann, Peter (2017): Motivated Health Risk Denial and Preventative Health Care Investments. Collaborative Research Center Transregio 190, Discussion Paper No. 33
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Abstract

People deny health risks, invest too little in disease prevention, and are highly sensitive to the price of preventative health care, especially in developing countries. Moreover, private sector R and D spending on developing-country diseases is almost non-existent. To explain these empirical observations, I propose a model of motivated belief formation, in which an agent's decision to engage in health risk denial balances the psychological benefits of reduced anxiety with the physical cost of underprevention. I use the model to study firms' price-setting behaviour and incentive to innovate. I also show that tax-funded prevention subsidies are welfare enhancing.