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Valuing Health Risk Changes Using a Life-Cycle Consumption Framework

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  • Stephen C. Newbold
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    Abstract

    Government agencies routinely use the “value of a statistical life” (VSL) in benefit-cost analyses of proposed environmental and safety regulations. Here I review an alternative approach for valuing health risks using a “life-cycle consumption framework.” This framework is based on an explicit individual-level lifetime utility function over health and income at all ages, and so could be used to examine any pattern of health risk changes over a person’s lifespan. I discuss several potential advantages of this framework, both positive and normative. From a positive perspective, this framework can support a functional benefit transfer approach that is more flexible and potentially more accurate than the standard point-value benefit transfer approach based on the VSL, and it can be used to evaluate mortality and morbidity effects simultaneously in an internally consistent model. From a normative perspective, it provides a natural foundation for a social welfare function and therefore could facilitate a unified evaluation of efficiency and equity, as a supplement to traditional benefit-cost analysis.

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    File URL: http://yosemite.epa.gov/ee/epa/eed.nsf/WPNumber/2011-03/$File/2011-03.PDF
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    Bibliographic Info

    Paper provided by National Center for Environmental Economics, U.S. Environmental Protection Agency in its series NCEE Working Paper Series with number 201103.

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    Length: 29 pages
    Date of creation: Apr 2011
    Date of revision: Apr 2011
    Handle: RePEc:nev:wpaper:wp201103

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    Keywords: VSL; life-cycle model; benefit-cost analysis; social welfare analysis; QALY; health-wealth tradeoff;

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    1. Thijs Dekker & Roy Brouwer & Marjan Hofkes & Klaus Moeltner, 2011. "The Effect of Risk Context on the Value of a Statistical Life: a Bayesian Meta-model," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 49(4), pages 597-624, August.
    2. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," NBER Working Papers 15756, National Bureau of Economic Research, Inc.
    3. Keane, Michael P., 2010. "Structural vs. atheoretic approaches to econometrics," Journal of Econometrics, Elsevier, vol. 156(1), pages 3-20, May.
    4. Alberini, Anna & Cropper, Maureen & Krupnick, Alan & Simon, N.B.Nathalie B., 2004. "Does the value of a statistical life vary with age and health status? Evidence from the US and Canada," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 769-792, July.
    5. Kirchhoff, Stefanie & Colby, Bonnie G. & LaFrance, Jeffrey T., 1997. "Evaluating the Performance of Benefit Transfer: An Empirical Inquiry," Journal of Environmental Economics and Management, Elsevier, vol. 33(1), pages 75-93, May.
    6. Eeckhoudt, Louis R & Hammitt, James K, 2001. " Background Risks and the Value of a Statistical Life," Journal of Risk and Uncertainty, Springer, vol. 23(3), pages 261-79, November.
    7. Smith, V. Kerry & Pattanayak, Subhrendu K. & Van Houtven, George L., 2006. "Structural benefit transfer: An example using VSL estimates," Ecological Economics, Elsevier, vol. 60(2), pages 361-371, December.
    8. John C. Bergstrom & Laura O. Taylor, . "Using Meta Analysis for Benefits Transfer: Theory and Practice," Experimental Economics Center Working Paper Series 2006-12, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
    9. Brouwer, Roy & Bateman, Ian J., 2005. "Benefits transfer of willingness to pay estimates and functions for health-risk reductions: a cross-country study," Journal of Health Economics, Elsevier, vol. 24(3), pages 591-611, May.
    10. Scotton, Carol R. & Taylor, Laura O., 2011. "Valuing risk reductions: Incorporating risk heterogeneity into a revealed preference framework," Resource and Energy Economics, Elsevier, vol. 33(2), pages 381-397, May.
    11. Cropper, Maureen L. & G. Sussman, Frances, 1990. "Valuing future risks to life," Journal of Environmental Economics and Management, Elsevier, vol. 19(2), pages 160-174, September.
    12. Krupnick, Alan & Alberini, Anna & Simon, Nathalie & Itaoka, Kenshi & Akai, Makoto & Cropper, Maureen, 2005. "Age, Health, and the Willingness to Pay for Mortality Risk Reductions: A Contingent Valuation Survey in Japan," Discussion Papers dp-05-34, Resources For the Future.
    13. Guang-Zhen Sun & Yew-Kwang Ng, 2009. "The age-dependent value of time: a life cycle analysis," Journal of Economics, Springer, vol. 97(3), pages 233-250, July.
    14. Anna Alberini & Alistair Hunt & Anil Markandya, 2006. "Willingness to Pay to Reduce Mortality Risks: Evidence from a Three-Country Contingent Valuation Study," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 33(2), pages 251-264, 02.
    15. Ng, Yew-Kwang, 1992. "Do individuals optimize in intertemporal consumption/savings decisions? A liberal method to encourage savings," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 101-114, January.
    16. Harrington, Winston & Portney, Paul R., 1987. "Valuing the benefits of health and safety regulation," Journal of Urban Economics, Elsevier, vol. 22(1), pages 101-112, July.
    17. Moeltner, Klaus & Boyle, Kevin J. & Paterson, Robert W., 2007. "Meta-analysis and benefit transfer for resource valuation-addressing classical challenges with Bayesian modeling," Journal of Environmental Economics and Management, Elsevier, vol. 53(2), pages 250-269, March.
    18. Mary F. Evans & V. Kerry Smith, 2008. "Complementarity and the Measurement of Individual Risk Tradeoffs: Accounting for Quantity and Quality of Life Effects," NBER Working Papers 13722, National Bureau of Economic Research, Inc.
    19. Leeth, John D & Ruser, John, 2003. " Compensating Wage Differentials for Fatal and Nonfatal Injury Risk by Gender and Race," Journal of Risk and Uncertainty, Springer, vol. 27(3), pages 257-77, December.
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