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Admissible utility functions for health, longevity, and wealth: integrating monetary and life-year measures

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  • James Hammitt

Abstract

The value of reducing health and mortality risks is often measured using value per statistical life (VSL) or one of several life-year measures (e.g., life years, quality-adjusted life years, disability-adjusted life years). I derive the utility function that is admissible when preferences for health and longevity, conditional on wealth, are consistent with any life-year measure (LYM) and examine the implications for marginal willingness to pay (WTP) for increases in health, longevity, and current-period survival probability. I conclude that marginal WTP for any LYM is decreasing and that VSL is increasing in the LYM. These results imply that cost-effectiveness analysis using a fixed monetary value per LYM is not consistent with economic welfare theory and that the benefit of a health improvement cannot be calculated by multiplying the change in a LYM by a constant. Copyright Springer Science+Business Media New York 2013

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  • James Hammitt, 2013. "Admissible utility functions for health, longevity, and wealth: integrating monetary and life-year measures," Journal of Risk and Uncertainty, Springer, vol. 47(3), pages 311-325, December.
    • Handle: RePEc:kap:jrisku:v:47:y:2013:i:3:p:311-325
    DOI: 10.1007/s11166-013-9178-4
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    More about this item

    Keywords

    Value per statistical life; Value per statistical life year; Quality-adjusted life year; Disability-adjusted life year; Healthy years equivalent; Willingness to pay; Risk aversion; D61; D81; I10;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • I10 - Health, Education, and Welfare - - Health - - - General

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