An Empirical Analysis of Health-Dependent Utility on SHARE and ELSA Data

Abstract

This paper investigates the presence of health-dependent utility on a panel of European countries. We follow the strategy of Finkelstein et al. (J Eur Econ Assoc 11:221–258, 2013) and extend their analysis focusing on different health measures. The results show that utility exhibits an increase in the marginal utility to consume when physical health deterioration occurs. For cognitive decline, we find a decrease in the marginal utility for low memory skills and an increase in the marginal utility for low verbal fluency. However, both are not statistically significant, thus the evidence is limited. We show that individuals living in low-spending countries for long-term care services experience the greatest drop in marginal utility compared to the others. Overall, these results suggest the presence of heterogeneity in the direction of the marginal utility when the sick state occurs, and this evidence goes in the opposite direction compared to the recent empirical findings for US. A potential explanation might be found in different welfare systems.