Income–Well-Being Gradient in Sickness and Health

Abstract

We propose a method for studying the value of insurance. For this purpose, we analyze the well-being of the same individuals, comparing sick and healthy years, using German panel survey data on life satisfaction. We impose structure on the income–well-being gradient by fitting a flexible utility function to the data, focusing on the differences in marginal utility in the sick and the healthy states. Notably, our empirical specification allows for a “fixed cost of sickness.” We find a higher marginal utility of income in the sick state. We use our estimates to gauge the value of sickness insurance for Baily-Chetty–type optimal policy calculations.

Publication Information

Kanninen, O., Böckerman, P. & Suoniemi, I. (2025), Income–Well-Being Gradient in Sickness and Health, Health Economics, 1–14.

• ISSN: 1057-9230, eISSN: 1099-1050
• JEL: C13, H55, I13