Health and the Marginal Utility of Consumption: Estimating Health State Dependence using Equivalence Scales

This paper estimates health state dependence in Europe. We develop a new approach that builds upon the approach by Finkelstein et al. (2013), and uses insights from the research domain of living standards and income adequacy. We estimate how much extra income is needed to keep nancial wellbeing equal after a health shock, and we derive a simple relation between this estimate and the parameter for health state dependence. We find positive health state dependence, with a proportionality factor equal to 0.284 in the presence of ADL limitations. The positive health state dependence is not driven by medical expenditures, and the result is robust against alternative speci fications and health measures such as mobility, IADL and the number of chronical diseases. Interestingly, for cognitive limitations we find negative health state dependence, presumably resulting from a decreased ability to plan, organize, and take initiatives.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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