Survival versus Consumption
We develop an indirect method to estimate utility and willingness to pay (WTP) for reductions in the risk of death at various ages. Using a life-cycle model of consumption, we assume that an individual sets his consumption level each year so as to maximize his expected lifetime utility. Alternative assumptions about opportunities for borrowing and annuities characterize two polar types of societies. In our Robinson Crusoe case, an individual must be entirely self-sufficient, and annuities are not available. In our perfect markets case, an individual can borrow against future earnings and purchase actuarially fair annuities; we show that under these assumptions WTP is the sum of livelihood (discounted expected future earnings) and consumer surplus. To illustrate our methods, we derive WTP for an average financially independent American man under plausible assumptions. The model is calibrated to 1978 earnings (e.g., $18,000 per year for men aged 45--54 with at least some income). In the Robinson Crusoe case, WTP increases from $500,000 at age 20 to a peak of $1,250,000 at age 40, and declines to $630,000 at age 60. In the perfect markets case, age variations are less pronounced; WTP is $1,050,000 at age 20, peaks at $1,070,000 at age 25, and declines to $600,000 at age 60. These results suggest that individuals value risks to their lives at several times the pro-rata share of their future earnings.
Volume (Year): 30 (1984)
Issue (Month): 4 (April)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:30:y:1984:i:4:p:423-439. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.