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What do happiness and health satisfaction data tell us about relative risk aversion?

  • Gandelman, Néstor
  • Hernández-Murillo, Rubén

In this paper we provide estimates of the coefficient of relative risk aversion using information on self-reports of subjective personal well-being from multiple datasets, including three cross-sectional surveys and two panel surveys, namely the Gallup World Poll, the European Social Survey, the World Values Survey, the British Household Panel Survey for the United Kingdom, and the General Social Survey for the United States. We additionally consider the implications of allowing for health-state dependence in the utility function on the estimates of risk aversion and examine how the marginal utility of income changes in poor health states. Our estimates of relative risk aversion with cross-section data vary closely around 1, which corresponds to logarithmic utility, while the estimates with panel data are slightly larger. We find that controlling for health dependence generally reduces these estimates. In contrast with other studies in the literature, our results also suggest that the marginal utility of income increases when satisfaction with health deteriorates, and this effect is robust across the various datasets analyzed.

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Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 39 (2013)
Issue (Month): C ()
Pages: 301-312

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Handle: RePEc:eee:joepsy:v:39:y:2013:i:c:p:301-312
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