How sensitive is the compensating income variation to severity and adaptation?

Abstract

Knowing the monetary value individuals place on health is essential in tackling resource allocation between health and other uses. However, health conditions vary greatly, not only with respect to main characteristics but also by severity and duration. We apply the compensating income variation (CIV) method to data from the Swiss Household Panel, years 2004–2019, to explore the sensitivity of CIV estimates to severity and adaptation across five different health conditions: headaches, back problems, sleep problems, fatigue, and chronic illness. Accounting for income endogeneity in the life-satisfaction equations and adjusting for individual random effects, we found the CIV estimates to range from $3184 for moderate headaches (women) to $100,066 for severe fatigue (men). Individuals with severe conditions needed to be compensated about three times more than those suffering less. Across the five conditions with two severity levels explored for adaptation, individuals only adapted to moderate headaches and severe sleep problems. In conclusion, not only does the value of health conditions vary greatly, but within each health condition its value on average triples when severe condition is reported as opposed to moderate. Adaptation plays a minor role in CIV estimates for the five health conditions explored.