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Income–well-being gradient in sickness and health

Author

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  • Kanninen, Ohto
  • Böckerman, Petri
  • Suoniemi, Ilpo

Abstract

We propose a method of studying the value of insurance. For this purpose, we analyze well-being of the same individuals, comparing sick and healthy years in German panel survey data on life satisfaction. To impose structure on the income–wellbeing gradient, we fit a flexible utility function to the data, focusing on the differences in marginal utility in the sick and the healthy state, by allowing for a “fixed cost of sickness”. We find that marginal utility of income is higher in the sick state. We use our estimates to gauge the value of sickness insurance for Baily-Chetty type optimal policy calculations. We also show that the income–wellbeing gradient has steepened over time in Germany and we use the fitted model to characterize this change.

Suggested Citation

  • Kanninen, Ohto & Böckerman, Petri & Suoniemi, Ilpo, 2022. "Income–well-being gradient in sickness and health," MPRA Paper 113269, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:113269
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    More about this item

    Keywords

    life satisfaction state dependence risk aversion social insurance optimal benefits sickness absence;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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