Measuring How Risk Tradeoffs Adjust with Income

38 Pages Posted: 28 Sep 2009 Last revised: 5 Jul 2010

See all articles by Mary F. Evans

Mary F. Evans

Claremont McKenna College - Robert Day School of Economics and Finance

V. Kerry Smith

Arizona State University (ASU) - Economics Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2009

Abstract

Efforts to reconcile inconsistencies between theory and estimates of the income elasticity of the value of a statistical life (IEVSL) overlook important restrictions implied by a more complete description of the individual choice problem. We develop a more general model of the IEVSL that reconciles some of the observed discrepancies. Our framework describes how exogenous income shocks, such as unexpected medical expenditures, may affect labor supply decisions which in turn influence both the coefficient of relative risk aversion and the IEVSL. The presence of a consumption commitment, such as a home mortgage, also alters this labor supply adjustment. We use data from the Health and Retirement Study to explore the responsiveness of labor force exit decisions to spousal health shocks and the role of a home mortgage as a constraint on this response.

Suggested Citation

Evans, Mary F. and Smith, V. Kerry, Measuring How Risk Tradeoffs Adjust with Income (September 2009). NBER Working Paper No. w15372. Available at SSRN: https://ssrn.com/abstract=1478790

Mary F. Evans

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
909.607.3423 (Phone)

V. Kerry Smith (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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