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Saturday, May 18, 2013

Valuation of Human Health: An Integrated Model of Willingness to Pay for Mortality and Morbidity Risk Reductions

http://yosemite.epa.gov/ee/epa/eed.nsf/WPNumber/2012-07
Abstract:
This paper develops and applies an integrated model of human mortality and morbidity valuation that is consistent with principles of welfare economics. The standard expected utility model of one person facing two health states (alive and dead) is extended to a setting in which two family members (a parent and a child) face three health states (healthy, sick, and dead). A key finding is that total health benefits of public programs equate to the sum of willingness to pay for reduced mortality risk plus a fraction of the willingness to pay for reduced morbidity risk. Implications of the integrated model are tested using two field data sets from the U.S. on skin cancer and leukemia risk reductions. Results obtained show how the integrated model can be used to increase the accuracy of health benefit estimation for benefit-cost analyses as well as for the design of public hazard reduction programs.
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Willingness to pay values obtained from the constrained estimates are presented in Table 6. These estimates show that parents are willing to pay $70.06 annually for a 100% reduction in unconditional mortality risk from skin cancer for themselves and are willing to pay $105.44 annually for a 100% reduction in unconditional mortality risk from skin cancer for their children.

For leukemia, constrained estimates suggest that parents are willing to pay $811.29 to eliminate their children’s unconditional mortality risk. This estimate exceeds the corresponding estimates for skin cancer possibly because in the leukemia study, parents were asked for an immediate, one-time payment for vaccines that would be effective for life; whereas in the skin cancer study, parents were asked how much they would pay in the first year for sun lotions when a stream of annual purchases would be required to maintain effectiveness. Table 6 also indicates that parents are willing to pay $760.81 to eliminate leukemia likelihood risk for themselves and -$295.02 (estimate not significantly different from zero at conventional levels) to eliminate conditional mortality risk for this disease for themselves.
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An “average” parent’s willingness to pay to reduce her children’s and her own unconditional mortality risk of skin cancer by 1 in 10,000 are $0.48 and $0.21, respectively. These point estimates suggest that parents are willing to pay more than twice as much to reduce unconditional mortality risk for their children than they are willing to pay to reduce their own risk.22 In light of the finding of perfect substitution between illness likelihood risk and conditional mortality risk, the value of reduced morbidity from skin cancer is zero. The “average” parent’s willingness to pay to reduce unconditional mortality risk from leukemia by 1 in 10,000 to their child is $4.28. In light of perfect substitution, the value of reduced morbidity risk for children implied by the estimates is equal to zero.
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VSL estimates can be obtained by multiplying the estimates of willingness to pay to reduce unconditional mortality risk shown in Table 7 by 10,000. The skin cancer estimates, which pertain to one-year risk reductions, suggest VSL values of $4,800 for children and $2,100 for adults. The corresponding VSL values for leukemia, which pertain to permanent risk reductions, are $42,800 for children and $13,100 for adults.
Two factors may help to explain why these VSL values are much lower than those generally obtained in labor market studies (Viscusi and Aldy 2003). First, labor market estimates of VSL are interpreted as the marginal value of saving one life; whereas estimates presented here are interpreted as the average willingness to pay to save one life in the case where unconditional mortality risk is eliminated.24 Marginal willingness to pay for a unit of risk reduction would be expected to decline as successive increments in risk reduction are considered (see Section 2), thus the VSL obtained here is expected to be lower than the estimates of VSL obtained in other studies. Second, parents tended to overestimate illness likelihood risk and conditional mortality risk in both the skin cancer and leukemia data sets. A given value for willingness to pay to eliminate reduced unconditional mortality risk may therefore underestimate willingness to pay to reduce a unit of risk.
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by Shelby Gerking 1, Mark Dickie 2 and Marcella Veronesi 3
1. Corresponding author, Department of Economics, University of Central Florida, P.O. 1400, Orlando, FL 32816-1400, United States and Department of Economics and Tilburg Sustainability Center, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, the Netherlands. email: 56f100pu@gmail.com phone: 407-349-9093 fax: 407-823-3669
2. Department of Economics, University of Central Florida, P.O. 1400, Orlando, FL 32816-1400, United States email: mdickie@bus.ucf.edu.
3. ETH Zurich, Universitaetstrasse 22, 8092 Zurich, Switzerland email: marcella.veronesi@env.ethz.ch
U.S. Environmental Protection Agency National Center for Environmental Economics (NCEE) http://yosemite.epa.gov/ee/epa/eed.nsf/webpages/homepage
Working Paper 12-07; October, 2012
Keywords: willingness to pay, children, environmental hazards, health, integrated analysis, morbidity, mortality, value of a statistical life, cancer, stated preference 

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