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Health, Income, and Risk Aversion: Assessing Some Welfare Costs of Alcoholism and Poor Health

  • John Mullahy
  • Jody L. Sindelar

The economic costs of adverse health outcomes have typically been evaluated in a context of risk neutrality, an approach that ignores the potential welfare importance of individuals' risk preferences. This paper presents a framework that unifies the research in health capital and earnings with that on risk preferences in the presence of stochastic outcomes. The model is implemented to obtain estimates of the economic damages due both to general health problems as well as to one specific health problem that is of considerable interest from society's perspective: alcoholism. Our empirical findings, based on data from the Epidemiologic Catchment Area survey, indicate that failure to recognize the possibility of risk averse preferences leads to a potentially serious underestimation of the magnitudes of the 'costs' of alcoholism and poor health. In particular, it is shown that while alcoholism problems have negative impacts on the conditional mean of income (consistent with most of the existing literature), they also have positive impacts on the conditional variance of income. Our conclusions are to some degree provisional because our estimates of conditional variances are necessarily biased to the extent that unobserved heterogeneity is an important determinant of the moment structure of income in our sample.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4649.

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Date of creation: Feb 1994
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Publication status: published as Journal of Human Resources, vol XXX, no. 3, Summer 1995, pp 439-459
Handle: RePEc:nbr:nberwo:4649
Note: HE
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  1. Pagan, Adrian & Vella, Frank, 1989. "Diagnostic Tests for Models Based on Individual Data: A Survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages S29-59, Supplemen.
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  6. Viscusi, W Kip & Evans, William N, 1990. "Utility Functions That Depend on Health Status: Estimates and Economic Implications," American Economic Review, American Economic Association, vol. 80(3), pages 353-74, June.
  7. Kopp, Raymond J. & Mullahy, John, 1990. "Moment-based estimation and testing of stochastic frontier models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 165-183.
  8. Bartel, Ann & Taubman, Paul, 1979. "Health and Labor Market Success: The Role of Various Diseases," The Review of Economics and Statistics, MIT Press, vol. 61(1), pages 1-8, February.
  9. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
  10. Chavas, Jean-Paul & Bishop, Richard C. & Segerson, Kathleen, 1986. "Ex ante consumer welfare evaluation in cost-benefit analysis," Journal of Environmental Economics and Management, Elsevier, vol. 13(3), pages 255-268, September.
  11. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  12. Luft, Harold S, 1975. "The Impact of Poor Health on Earnings," The Review of Economics and Statistics, MIT Press, vol. 57(1), pages 43-57, February.
  13. Tauchen, George, 1985. "Diagnostic testing and evaluation of maximum likelihood models," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 415-443.
  14. Strauss, John, 1986. "Does Better Nutrition Raise Farm Productivity?," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 297-320, April.
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