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Measuring How Risk Tradeoffs Adjust With Income

  • Mary F. Evans
  • V. Kerry Smith

Efforts to reconcile inconsistencies between theory and estimates of the income elasticity of the value of a statistical life (IEVSL) overlook important restrictions implied by a more complete description of the individual choice problem. We develop a more general model of the IEVSL that reconciles some of the observed discrepancies. Our framework describes how exogenous income shocks, such as unexpected medical expenditures, may affect labor supply decisions which in turn influence both the coefficient of relative risk aversion and the IEVSL. The presence of a consumption commitment, such as a home mortgage, also alters this labor supply adjustment. We use data from the Health and Retirement Study to explore the responsiveness of labor force exit decisions to spousal health shocks and the role of a home mortgage as a constraint on this response.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15372.

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Date of creation: Sep 2009
Date of revision:
Publication status: published as Mary Evans & V. Smith, 2010. "Measuring how risk tradeoffs adjust with income," Journal of Risk and Uncertainty, Springer, vol. 40(1), pages 33-55, February.
Handle: RePEc:nbr:nberwo:15372
Note: EEE
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  9. 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.
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