Compensating Income Variation Research Articles

Compensating income variation in health and subjective well-being for the self-employed

Complementing growing interest in entrepreneurship and well-being, we apply a conceptualization of compensating income variation (CIV) – how much extra income an individual would require offsetting the loss in subjective well-being from a unit decline in health – in health economics to entrepreneurship. We hypothesize and test the extent of the CIV among the self-employed and whether the CIV varies by sex and age. We use a Bayesian vector auto-regression model in the Household, Income, and Labour Dynamics in Australia (HILDA) Survey data. We find that the CIV for the self-employed (employed) was AUD 10,315 (AUD 6,873) annually for a unit decrease in subjective well-being. We do not find significant differences in the CIV among the self-employed by sex and age. The findings show that the self-employed requires higher compensatory income to accept poorer health.

Life satisfaction and body mass index: estimating the monetary value of achieving optimal body weight.

According to the World Health Organization, obesity is one of the greatest public-health challenges of the 21st century. Body weight is also known to affect individuals' self-esteem and interpersonal relationships, including romantic ones. We estimate the "utility-maximizing" Body Mass Index (BMI) and calculate the implied monetary value of changes in both individual and spousal BMI, using the compensating income variation method and data from the Swiss Household Panel. We employ the Oster's method (Oster, 2019) to estimate the degree of omitted variable bias in the effect of BMI on life satisfaction. Results suggest that the optimal own BMI is 27.1 and 20.1 for men and women, respectively. The annual value of reaching optimal weight ranges from $7069 for women with underweight to $88,709 for women with obesity and between $95,165 for men with underweight to $32,644 for men with obesity. On average, women value reduction in their own BMI about four times higher than reduction in their spouse's BMI. Men, on the other hand, value a reduction in their spouse's BMI almost twice as much compared to a reduction in their own BMI. This highlights important gender differences and relative effects based on spousal BMI.

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

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.

The individual private cost of problematic alcohol use: a compensating income variation approach

ABSTRACT While the social cost of problematic alcohol use has been examined, limited information exists on the private cost incurred by consumers. Using Icelandic panel data and the compensating income variation (CIV) method we estimate this individual private cost. We examine results using different measures of problematic alcohol use, two non-linear functional forms for income, and two utility proxies. We estimate the yearly individual cost, or CIV, to be 4–62 thousand USD. These estimates are considerably higher if not adjusted for income endogeneity. Results suggest that the CIV method is highly sensitive to model specifications in two areas: (i) The modelling of income; log-transformation contrasted with a piecewise-linear form shows that high-income groups affect full sample CIVs substantially, highlighting differences between mean and median value-estimates. This raises ethical questions on the trade-off between utilitarian policies based on means and largely driven by high-income groups, versus policies guided by median values that benefit most individuals. (ii) The choice of utility proxy; the CIV using happiness is substantially higher than that obtained using life satisfaction. This highlights the need for policy makers to consider whether their objectives should focus on cognitive measures of subjective well-being or affective measures.

Life Satisfaction and Body Mass Index: Estimating the Monetary Value of Achieving Optimal Body Weight

According to the World Health Organization, obesity is one of the greatest public-health challenges of the 21st century. Body weight is also known to affect individuals’ self-esteem and interpersonal relationships, including romantic ones. We estimate “utility-maximizing” Body Mass Index (BMI) and calculate the implied monetary value of changes in both individual and spousal BMI, using the compensating income variation method and data from the Swiss Household Panel. Two-stage least squares models are estimated for women and men separately, with mother’s education as an instrument to account for the potential endogeneity in income. Results suggest that the optimal own BMI is 27.4 and 22.7 for men and women, respectively. The annual value of reaching optimal weight ranges from $3,235 for underweight women to $32,378 for obese women and from $19,088 for underweight men to $43,175 for obese men. Women on average value changes in their own BMI about three times higher than changes in their spouse’s BMI. Men, on the other hand, value a reduction in their spouse’s BMI almost twice as much compared to a reduction in their own BMI.

The value of normal body weight: evidence from Iceland

ABSTRACT Calculations of societal costs of underweight, overweight and obesity have generally failed to include the value of the utility reductions, associated with deviations from normal weight. To remedy this, the monetary compensation needed to offset the welfare loss associated with being underweight, overweight, or obese, according to World Health Organizations standards, is estimated. For this purpose, the compensating income variation (CIV) method is applied to individual-level data from an Icelandic health and lifestyle survey carried out in 2007, 2009, 2012, and 2017. The results show that both males and females would on average be willing to pay a positive amount to move from obesity to normal weight, albeit a varying amount by income group. The CIV for moving from obesity to normal weight among males for the low-, medium-, and high-income groups are $18,022, $25,768, and $632,002 per year. In comparison the same results for females are $9,191, $16,239, and $95,494. However, only females show a positive willingness to pay for not being overweight. The CIV for overweight females for the three income groups is $3,608, $6,375, and $37,488 per year.

Health-related quality of life and compensating income variation for 18 health conditions in Iceland

ABSTRACTUsing data from an Icelandic health and well-being survey, carried out in 2007, 2009, and 2012, we estimate the value of health-related suffering in two different ways. Our primary aim is to obtain the monetary compensation needed to maintain the same level of well-being with and without 18 health conditions using the compensating-income-variation approach. This method employs individual well-being measures with no hypothetical situations involved, thus offering a solution to biases of frequently used methods to value non-marketed goods. We also use zero-one normalization of regression coefficients to estimate health-related quality-of-life weights. Results from monetary valuations indicate that 1,685,594 USD are needed per year to compensate for the presence of melancholy, 206,273 USD for frequent headaches, 153,396 USD for severely low vision, and 80,824 USD for severe monthly menstrual cramps. This research adds to the literature by employing two rarely used methods to a range of health conditions. By valuing several different conditions with the same sample and methodology this research provides a ranking between the conditions, aiding policy makers in prioritizing scarce resources. We do however advise against using the normalization method for policy purposes at this point, due to the deviation of results from the general literature.

Changes in health-related quality of life: a compensating income variation approach

ABSTRACTThis paper investigates the relationship between negative changes in health and life satisfaction, using a sample from the Household, Income and Labour Dynamics of Australia Survey. We use panel data models and estimate the life satisfaction impact of several different changes in health status to calculate the Compensating Income Variation (CIV) of them. Our work innovates with respect to the existing literature by using a more robust CIV method that takes account of the potential measurement error in income. Further, we produce the first set of monetary values for health losses using SF-6D utility values, one of the main measures used to estimate and value health change for economic evaluation. We show that negative changes in SF-6D are significantly associated with a reduction in life satisfaction, and the starting point matters: a drop of 0.1 in SF-6D score is associated with a decrease of 0.12 points in life satisfaction if the starting utility value is 0.8, but the effect is 100% higher if the SF-6D starting point is 0.7. More generally, we find that a 0.1 deterioration in SF-6D has a strong association with life satisfaction and that the CIV value is substantial (over US$ 120,000).

The Transmission of Mental Health within Households: Does One Partner's Mental Health Influence the Other Partner's Life Satisfaction?

This paper investigates the relationship between partner's mental health and individual life satisfaction, using a sample of married and cohabitating couples from the Household, Income and Labour Dynamics of Australia Survey (HILDA). We use panel data models with fixed effects to estimate the life satisfaction impact of several different measures of partner's mental health and to calculate the Compensating Income Variation (CIV) of them. To the best of our knowledge, this is the first paper to study the effect of partner's mental health on individual's wellbeing and to measure the impact of reduced life satisfaction in monetary terms. We also provide some new insights into adaptation and coping mechanisms. Accounting for measurement error and endogeneity of income, partners' mental health has a significant and sizeable association with individual well-being. The additional income needed to compensate someone living with a partner with a long term mental condition is substantial (over USD 60,000). Further, individuals do not show significant adaptation to partners' poor mental health conditions, and coping mechanisms show little influence on life satisfaction. The results have implications for policy-makers wishing to value the wider effects of policies that aim to impact on mental health and overall levels of well-being.

A compensating income variation approach to valuing 34 health conditions in Iceland

Using data from an Icelandic health-and-lifestyle survey carried out in 2007, 2009, and 2012, we employ a compensating income variation (CIV) approach to estimate the monetary value sufficient to compensate individuals for the presence of various sub-optimal health conditions. This method is inexpensive and easy on subjects and has been applied to several desiderata that do not have revealed market prices. The CIV literature is, however, still limited in its application to health and thus information about its suitability is limited. With the aim of shedding light on the method́s appropriateness we thus provide a broad-view analysis including a spectrum of diseases and conditions that can be held up against more traditionally used methods. CIV for physical conditions vary greatly, but paralysis, fibromyalgia, chronic back pain, rheumatoid arthritis, urinary incontinence, severe headache and thyroid disease were among those consistently associated with substantial well-being reductions. Mental-health results using this method should be read with caution. The societal value of health interventions is multidimensional, including for example increased productivity in the population. However, one of the main positive aspects of increased health is undoubtedly the increased well-being of the treated subjects. Such quality-of-life effects should thus preferably be taken into account. For this reason, information on the value individuals place on recovery from various sub-optimal health conditions is useful when it comes to prioritizing scarce capital in the health sector. It is therefore vital to estimate the importance individuals place on various health states and hold them up against each other. Furthermore, this paper has scientific value as it sheds light on attributes of a potentially useful method in health evaluations.

Less money or better health? Evaluating individual’s willingness to make trade-offs using life satisfaction data

Health care practitioners are increasingly required to make more efficient decisions when it comes to allocating health care expenditure. This requires not only information relating to the costs of medical interventions, but also the benefits of such interventions on individual’s overall well-being. In order to calculate the well-being losses associated with health conditions, this study uses the compensating income variation approach (CIV), to calculate the amount of extra equivalent household income to make someone who suffers from one of 15 health conditions, as well off in terms of life satisfaction as someone who does not have these health conditions. To help put these findings into perspective, this study also calculates CIVs for many other factors commonly found to be significantly associated with subjective well-being (e.g. unemployment, widowhood, separation and indicators of social capital). This paper builds on previous work using CIVs in health by addressing the issue of income endogeneity in life satisfaction and also testing how robust the derived CIVs are to the inclusion of personality measures, namely the Big Five personality traits. The analysis suggests that health conditions significantly affect individual’s quality of life and that the amount needed to make someone with a health condition as well off as someone without those health conditions can be substantive, albeit less than is commonly reported in the literature using the CIV approach to date.

The effect of chronic pain on life satisfaction: Evidence from Australian data

Chronic pain is associated with significant costs to individuals directly affected by this condition, their families, the healthcare system, and the society as a whole. This paper investigates the relationship between chronic pain and life satisfaction using a sample of around 90,000 observations from the first ten waves of the Household, Income and Labour Dynamics of Australia Survey (HILDA), which is a representative survey of the Australian population that started in 2000. We estimate the negative impact on life satisfaction and examine the persistence of the effect over multiple years. Chronic pain is associated with poor health conditions, disability, decreased participation in the labour market and lower quality of life. We calculate the compensating income variation of chronic pain, based on the measurement of chronic pain, the life satisfaction of individuals and the income of households. Panel data models with random and fixed effects are used to control for characteristics of individuals that do not vary over time. Further, we investigate whether individuals who experience chronic pain exhibit adaptation and recovery in life satisfaction after 3 years. Overall, we find that chronic pain has a large negative association with life satisfaction, and that the compensating income variation is substantial (around 640 US$ per day).

Monetary valuation of cardiovascular disease in Canada

The study estimated a well-being function to determine how much monetary value individuals assign for cardiovascular disease in Canada. The study found that the calculated compensating income variation is $33,701, suggesting that an individual is required to be paid this amount to compensate for the loss in well-being due to cardiovascular disease. The study further shows that the compensating income variation is higher for women than for men. The study also finds that compensating income variation decreases with age.

How does social trust lead to better governance? An attempt to separate electoral and bureaucratic mechanisms

This paper explores questions related to the association between social trust and governance. In particular, the paper explores whether the trust-governance association is mainly a reflection of political responsiveness to the demands of the electorate or of the supply of honest politicians and bureaucrats. After outlining some simple theory, the findings suggest that the association reflects a causal influence of both types of trust on institutions of economic-judicial governance while electoral institutions are not associated with social trust. Assessed at the sample mean, the value of social trust under high political competition as evaluated by the compensating income variation is substantial.

The value of health

BackgroundA major problem in cost-effectiveness studies is where to draw the line between interventions which are cost-effective and those who are not. Lacking a notion about the value of a QALY, all ultimate values to the cost-effectiveness ratio are essentially arbitrary.MethodsThis paper presents a simple empirical model to estimate the compensating income variation of diseases and health problems. The model is estimated using data for the Netherlands.ResultsThe compensating income variation is between €20,000 and €90,000. This is higher than most of the ultimate values used by policy-makers to decide whether an intervention is cost-effective. Our figures are roughly similar to those found in studies about the value of a statistical life year.ConclusionEstimates on the compensating income variation of diseases and health problems may provide useful information on the maximum acceptable cost-effectiveness ratio of medical interventions than those currently used by policy makers.

Welfare effects of the euro cash changeover

Using merged data from the British Household Panel Survey (BHPS) and the German Socio-Economic Panel (SOEP), this paper applies a parametric difference-in-differences approach to assess the real effects of the introduction of the euro on subjective well-being. A complementary nonparametric approach is also used to analyze the impact of difficulties with the new currency on well-being. The results indicate a loss in well-being associated with the introduction of the new currency, with the predicted probability that a person is contented with his/her household income diminishing by 9.7 percentage points. We calculate a compensating income variation of approximately one-third. That is, an increase in post-government household income of more than 30% is needed to compensate for the clear decline in well-being. The reasons for the negative impact are threefold. First, perceived inflation overestimates the real increase in prices resulting in suboptimal consumption decisions. Second, money illusion causes a false assessment of the budget constraint. Third, individuals have to bear the costs from the conversion and the adjustment to the new currency. Moreover, it is thought that losses are higher for persons who have difficulties with the new currency. However, the impact of difficulties in using and converting the new currency is rather small, and the initial problems were overcome within one year of the introduction of euro cash.

Optimism, pessimism and the compensating income variation of cardiovascular disease: A two-tiered quality of life stochastic frontier model

Self-reported measures of life satisfaction may be biased by optimistic or pessimistic dispositions of respondents. In this paper we view life satisfaction as stochastic and estimate a two-tiered quality of life stochastic frontier model to account for upward and downward biases in self-reported quality of life questions. Using the British Household Panel Survey 1995, we interpret the two one-sided errors to represent optimism and pessimism, respectively. The results suggest that the realistic values of life satisfaction are closer to the pessimistic values than to the optimistic ones. It is further found that men are relatively more optimistic and less pessimistic than women. Cardiovascular disease makes people both less optimistic and less pessimistic. The results are used to calculate the compensating income variation (CIV) of cardiovascular disease. It is found that the CIV is substantial.

The Compensating Income Variation of Social Capital

There is a small but growing literature on the determinants of social capital. Most of these studies use a measure of trust to define social capital empirically. In this paper we use three different measures of social capital: the size of the individual’s social network, the extent of their social safety net and membership of unions or associations. A second contribution to the literature is that we analyze what social capital contributes to our well-being. Based on this, we calculate the compensating income variation of social capital. We find differences in social capital when we differentiate according to individual characteristics such as education, age, place of residence, household composition and health. Household income generally has a statistically significant effect. We find a significant effect of social capital on␣life␣satisfaction. Consequently, the compensating income variation of social capital is substantial. This working paper has resulted in a publication in Social Indicators Research , 2007, 82(2), 189-207.

The Compensating Income Variation of Social Capital

There is a small but growing literature on the determinants of social capital. Most of these studies use a measure of trust to define social capital empirically. In this paper we use three different measures of social capital: the size of the individual’s social network, the extent of their social safety net and membership of unions or associations. A second contribution to the literature is that we analyze what social capital contributes to our well-being. Based on this, we calculate the compensating income variation of social capital. We find differences in social capital when we differentiate according to individual characteristics such as education, age, place of residence, household composition and health. Household income generally has a statistically significant effect. We find a significant effect of social capital on␣life␣satisfaction. Consequently, the compensating income variation of social capital is substantial.

The compensating income variation of cardiovascular disease

This paper uses longitudinal data from the British Household Panel Survey to calculate the compensating income variation (CIV) of cardiovascular disease. It is found that the CIV decreases with age and is higher for men than for women. For women the estimated CIV is similar to those calculated by Groot et al. (2004). For men the estimates are somewhat higher than earlier reported.