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Health, Income, and Risk Aversion: Assessing Some Welfare Costs of Alcoholism and Poor Health

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  • John Mullahy
  • Jody L. Sindelar

Abstract

The economic costs of adverse health outcomes have typically been evaluated in a context of risk neutrality, an approach that ignores the potential welfare importance of individuals' risk preferences. This paper presents a framework that unifies the research in health capital and earnings with that on risk preferences in the presence of stochastic outcomes. The model is implemented to obtain estimates of the economic damages due both to general health problems as well as to one specific health problem that is of considerable interest from society's perspective: alcoholism. Our empirical findings, based on data from the Epidemiologic Catchment Area survey, indicate that failure to recognize the possibility of risk averse preferences leads to a potentially serious underestimation of the magnitudes of the 'costs' of alcoholism and poor health. In particular, it is shown that while alcoholism problems have negative impacts on the conditional mean of income (consistent with most of the existing literature), they also have positive impacts on the conditional variance of income. Our conclusions are to some degree provisional because our estimates of conditional variances are necessarily biased to the extent that unobserved heterogeneity is an important determinant of the moment structure of income in our sample.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4649.

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Date of creation: Feb 1994
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Handle: RePEc:nbr:nberwo:4649

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  1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  2. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
  3. Benjamin Eden & Ariel Pakes, 1981. "On Measuring the Variance-Age Profile of Lifetime Earnings," UCLA Economics Working Papers 196, UCLA Department of Economics.
  4. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-30, June.
  5. Luft, Harold S, 1975. "The Impact of Poor Health on Earnings," The Review of Economics and Statistics, MIT Press, vol. 57(1), pages 43-57, February.
  6. Tauchen, George, 1985. "Diagnostic testing and evaluation of maximum likelihood models," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 415-443.
  7. Viscusi, W Kip & Evans, William N, 1990. "Utility Functions That Depend on Health Status: Estimates and Economic Implications," American Economic Review, American Economic Association, vol. 80(3), pages 353-74, June.
  8. Smith, V Kerry & Desvousges, William H, 1987. "An Empirical Analysis of the Economic Value of Risk Changes," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 89-114, February.
  9. Grossman, Michael, 1972. "On the Concept of Health Capital and the Demand for Health," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 223-55, March-Apr.
  10. Pagan, Adrian & Vella, Frank, 1989. "Diagnostic Tests for Models Based on Individual Data: A Survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages S29-59, Supplemen.
  11. Kopp, Raymond J. & Mullahy, John, 1990. "Moment-based estimation and testing of stochastic frontier models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 165-183.
  12. Chavas, Jean-Paul & Bishop, Richard C. & Segerson, Kathleen, 1986. "Ex ante consumer welfare evaluation in cost-benefit analysis," Journal of Environmental Economics and Management, Elsevier, vol. 13(3), pages 255-268, September.
  13. Strauss, John, 1986. "Does Better Nutrition Raise Farm Productivity?," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 297-320, April.
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Cited by:
  1. Christiaensen, Luc J.M. & Boisvert, Richard N., 2000. "Validating Operational Food Security Indicators Against A Dynamic Benchmark," 2000 Annual meeting, July 30-August 2, Tampa, FL 21781, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. Andrén, Daniela & Palmer, Edward, 2001. "The Effect Of Sickness On Earnings," Working Papers in Economics 45, University of Gothenburg, Department of Economics.
  3. Kuchler, Fred & Golan, Elise H., 1999. "Assigning Values To Life: Comparing Methods For Valuing Health Risks," Agricultural Economics Reports 34037, United States Department of Agriculture, Economic Research Service.
  4. Christiaensen, Luc J.M. & Boisvert, Richard N., 2000. "On Measuring Household Food Vulnerability: Case Evidence from Northern Mali," Working Papers 127676, Cornell University, Department of Applied Economics and Management.
  5. Christiaensen, Luc J. & Boisvert, Richard N. & Hoddinott, John, 2000. "Validating operational food insecurity indicators against a dynamic benchmark : evidence from Mali," Policy Research Working Paper Series 2471, The World Bank.

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