Health and consumption preferences; estimating the health state dependence of utility using equivalence scales

Abstract

This paper estimates health state dependence of utility in Europe. For identification we introduce a new method using insights from the research domain of living standards. We estimate how much extra (or less) income is needed to maintain the same level of material wellbeing after a health shock, and we derive a simple relation between this estimate and the health state dependence parameter. The results show positive health state dependence. This is not driven by medical expenditures, and is robust across alternative specifications and health measures. Interestingly, for cognitive limitations we find negative health state dependence, presumably resulting from a decreased ability to plan.