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

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  • John Mullahy
  • Jody L. Sindelar

Abstract

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.

Suggested Citation

  • John Mullahy & Jody L. Sindelar, 1994. "Health, Income, and Risk Aversion: Assessing Some Welfare Costs of Alcoholism and Poor Health," NBER Working Papers 4649, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4649
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    References listed on IDEAS

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    Cited by:

    1. Christiaensen, Luc J.M. & Boisvert, Richard N., 2000. "On Measuring Household Food Vulnerability: Case Evidence from Northern Mali," Working Papers 127676, Cornell University, Department of Applied Economics and Management.
    2. Andrén, Daniela & Palmer, Edward, 2001. "The Effect Of Sickness On Earnings," Working Papers in Economics 45, University of Gothenburg, Department of Economics.
    3. Kuchler, Fred & Golan, Elise H., 1999. "Assigning Values To Life: Comparing Methods For Valuing Health Risks," Agricultural Economics Reports 34037, United States Department of Agriculture, Economic Research Service.
    4. Christiaensen, Luc J.M. & Boisvert, Richard N., 2000. "Validating Operational Food Security Indicators Against A Dynamic Benchmark," 2000 Annual meeting, July 30-August 2, Tampa, FL 21781, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. repec:eee:labchp:v:3:y:1999:i:pc:p:3309-3416 is not listed on IDEAS
    6. Christiaensen, Luc J. & Boisvert, Richard N. & Hoddinott, John, 2000. "Validating operational food insecurity indicators against a dynamic benchmark : evidence from Mali," Policy Research Working Paper Series 2471, The World Bank.

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    JEL classification:

    • I1 - Health, Education, and Welfare - - Health

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