What Do Happiness and Health Satisfaction Data Tell Us About Relative Risk Aversion?

Federal Reserve Bank of St. Louis Working Paper No. 2011-039D

29 Pages Posted: 12 Apr 2012 Last revised: 3 Oct 2013

Date Written: July 1, 2013

Abstract

In this paper we provide estimates of the coefficient of relative risk aversion using information on self-reports of subjective personal well-being from multiple datasets, including three cross-sectional surveys and two panel surveys, namely the Gallup World Poll, the European Social Survey, the World Values Survey, the British Household Panel Survey for the United Kingdom, and the General Social Survey for the United States. We additionally consider the implications of allowing for health-state dependence in the utility function on the estimates of risk aversion and examine how the marginal utility of income changes in poor health states. Our estimates of relative risk aversion with cross-section data vary closely around 1, which corresponds to logarithmic utility, while the estimates with panel data are slightly larger. We find that controlling for health dependence generally reduces these estimates. In contrast with other studies in the literature, our results also suggest that the marginal utility of income increases when satisfaction with health deteriorates, and this effect is robust across the various datasets analyzed.

Keywords: relative risk aversion, marginal utility of income, happiness, health dependence

JEL Classification: D80, G00, I10, I31

Suggested Citation

Gandelman, Nestor and Hernandez-Murillo, Ruben, What Do Happiness and Health Satisfaction Data Tell Us About Relative Risk Aversion? (July 1, 2013). Federal Reserve Bank of St. Louis Working Paper No. 2011-039D, Available at SSRN: https://ssrn.com/abstract=2038603 or http://dx.doi.org/10.2139/ssrn.2038603

Nestor Gandelman

Universidad ORT Uruguay ( email )

Bulevar España 2633
Montevideo, 11.300
Uruguay

Ruben Hernandez-Murillo (Contact Author)

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