How does your health affect how much you value an extra dollar of income? You could think that if you are sick, you have a low marginal utility of income perhaps because your illness does not allow you to leave the house or you are focused on the simple things in life. On the other hand, people who are sick may have a high marginal utility of income since they value money to pay for medical treatments.
A paper by Gyrd Hansen (2017) attempts to answer this question using a survey of 2,000 Danes. They surveyed patients and asked them to allowed incomes across two periods. In one period they were relatively health and in the other they had an impairment of varying severity.
The authors found that:
Preferences were heterogeneous with a significant proportion of respondents choosing to distribute income loss equally over the 2 years, or preferring to avoid loss of income in either the healthy state or the unhealthy state…
The authors did find that disease severity did affect the marginal utility of income. However, this relationship is not linear.
The results of this study (and the majority of the findings in the literature) suggest that health status impacts on the marginal utility of consumption. Our findings imply that for medium range health deteriorations we are likely to find a positive relationship between health deterioration and increased marginal utility of consumption implying a positive health state dependent utility. Our results also suggest that this relationship does not necessarily hold over all ranges of health shocks.
- Gyrd‐Hansen, Dorte. “A stated preference approach to assess whether health status impacts on marginal utility of consumption.” Health economics (2016).