Less money or better health? Evaluating individual’s willingness to make trade-offs using life satisfaction data

Health care practitioners are increasingly required to make more efficient decisions when it comes to allocating health care expenditure. This requires not only information relating to the costs of medical interventions, but also the benefits of such interventions on individual’s overall well-being. In order to calculate the well-being losses associated with health conditions, this study uses the compensating income variation approach (CIV), to calculate the amount of extra equivalent household income to make someone who suffers from one of 15 health conditions, as well off in terms of life satisfaction as someone who does not have these health conditions. To help put these findings into perspective, this study also calculates CIVs for many other factors commonly found to be significantly associated with subjective well-being (e.g. unemployment, widowhood, separation and indicators of social capital). This paper builds on previous work using CIVs in health by addressing the issue of income endogeneity in life satisfaction and also testing how robust the derived CIVs are to the inclusion of personality measures, namely the Big Five personality traits. The analysis suggests that health conditions significantly affect individual’s quality of life and that the amount needed to make someone with a health condition as well off as someone without those health conditions can be substantive, albeit less than is commonly reported in the literature using the CIV approach to date.