Priority Setting in Health Care: Disentangling Risk Aversion from Inequality Aversion

Abstract

In this paper we introduce a tractable social welfare function that is rich enough to disentangle preferences towards risk in health outcomes from preferences towards health inequalities across individuals. Given this preference specification we evaluate how uncertainty over the severity of illness and over the effectiveness of treatments affects the optimal allocation of health care resources. We show that the way in which uncertainty affects the optimal allocation within our proposed specification may differ sharply from that in the standard utilitarian framework. We also derive explicit solutions for the optimal allocation under risk for the case of a “Rawlsian” society.

Keywords: Risk aversion, inequality aversion, social welfare function, health uncertainty, budget allocation

JEL Classification: I14, I31, H51, D63, D81