Health, Income, and Risk Aversion: Assessing Some Welfare Costs of Alcoholism and Poor Health / John Mullahy, Jody L. Sindelar.

Format:

Book

Author/Creator:

Mullahy, John.

Contributor:

National Bureau of Economic Research.

Sindelar, Jody L.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4649.

NBER working paper series no. w4649

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Health, Income, and Risk Aversion

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1994.

Summary:

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.

Notes:

Print version record

February 1994.