Marginal Utility Of Income Research Articles

Valuing Local Environmental Amenity with Discrete Choice Experiments: Spatial Scope Sensitivity and Heterogeneous Marginal Utility of Income

Using discrete choice experiments we examine preferences for the spatial provision of local environmental improvements in the context of regeneration policies. Amenities we consider are: improvements to areas of open space, recreation facilities and other public spaces; street cleanliness; restoration of derelict properties; and the provision of paths dedicated to cycling and walking. We include the spatial scope of the policy as an attribute, making the trade-off between environmental amenity and its spatial provision explicit. We employ a novel estimator for average willingness to pay (WTP) for mixed logit models with a random cost coefficient, which is robust to the presence of price insensitive respondents and performs well relative to mixed logit estimation in WTP space. We find that the spatial scope of the policy affects both the intensity and heterogeneity of preferences, and that these effects are of statistical and economic significance.

The effects of current income and expected change in future income on stated preferences for environmental improvements

Abstract We formulate and test the hypothesis that expectations regarding changes in future income influences the WTP for environmental goods. For valuation of environmental goods in forests and other habitats in Denmark, we find that both current income and expected changes in future income are significant determinants for preferences. The effect of income on WTP seems to be caused by changes in preferences for environmental attributes rather than by marginal utility of income. The results suggest that to evaluate the distributional impacts of environmental improvements, researchers need a better measure of expected future consumption options than current income.

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Vertical Externalities in a Tax Setting in a System of Hierarchical Governments

This paper focuses on the overlap in the tax bases between two levels of government. This overlap leads to vertical fiscal externalities that arise when several different commodities are in the tax base and the tax bases of the two levels of government may not be identical. In the unified government’s case, if it is supposed that the marginal utilities of income for the two states are the same, the tax policy in state i not only considers the price elasticity and cross elasticity of each state, but also the shares of expenditure on commodities x1 and x2 in the different states. When the cross elasticity is zero, the tax rates on the same commodity sold in the different states and the price elasticity should be inversely related. If the cross elasticity of the commodities is zero, the higher the marginal utility of income of state i, the lower should be the tax rate set by the unified government in state i.

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

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.

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Happiness Inequality: How Much is Reasonable?

We compute the Gini indexes for income, happiness and various simulated utility levels. Due to decreasing marginal utility of income, happiness inequality should be lower than income inequality. We find that happiness inequality is about half that of income inequality. To compute the utility levels we need to assume values for a key parameter that can be interpreted as a measure of relative risk aversion. If this coefficient is above one, as many economists believe, then a large part of happiness inequality is not related to pecuniary dimensions of life.

Pricing urban congestion: A structural random utility model with traffic anticipation

We design and estimate a game theoretic congestion pricing mechanism in which the regulator aims at reducing urban traffic congestion by price discriminating travelers according to their value of time (VOT). Travelers' preferences depend on their observable characteristics, on the endogenous amount of congestion anticipated, on their marginal utility (MU) of income and on some unobserved factors. Using a French household survey, we estimate the demand models to simulate different pricing mechanisms. We find that unobserved determinants of transportation demand are significant and are used to measure the anticipated time spent in traffic and the comfort of traveling: diverging from these expectations is felt as more discomfort than if no expectations were formed a priori. However, some of this discomfort is derived from travelers' marginal utility of income: the lost time in traffic is clearly “unpleasant” because of its opportunity cost. When the regulator and the transportation provider share common objectives, we show that a great welfare improvement can be achieved when implementing a homogenous pricing that accurately accounts for travelers VOT.

How wrong can you be? Implications of incorrect utility function specification for welfare measurement in choice experiments

Despite the vital role of the utility function in welfare measurement, the implications of working with incorrect utility specifications have been largely neglected in the choice experiments literature. This paper addresses the importance of specification with a special emphasis on the effects of mistaken assumptions about the marginal utility of income. Monte Carlo experiments were conducted using different functional forms of utility to generate simulated choices. Multi-Nomial Logit and Mixed Logit models were then estimated on these choices under correct and incorrect assumptions about the true, underlying utility function. Estimated willingness to pay measures from these choice modeling results are then compared with the equivalent measures directly calculated from the true utility specifications. Results show that for the parameter values and functional forms considered, a continuous-quadratic or a discrete-linear attribute specification is a good option regardless of the true effects the attribute has on utility. We also find that mistaken assumptions about preferences over costs magnify attribute mis-specification effects.

Personality and the marginal utility of income: Personality interacts with increases in household income to determine life satisfaction

Economics implicitly assumes that the marginal utility of income is independent of an individual's personality. We show that this is wrong. This is the first demonstration that there are strong personality–income interactions. In an analysis of 13,615 individuals over 4-years we show that individuals who have high levels of conscientiousness obtain more satisfaction to their lives from increases to their household income. There are strong gender differences and women that are open-to-experiences, introverted or neurotic get lower satisfaction from household income increases. Our findings have important implications for the use of financial incentives to influence behavior. In the future, public policy may benefit from being personality-specific.

Reassessing catastrophic health-care payments with a Nigerian case study

Health financing reforms have recently received much attention in developing countries. However, out-of-pocket payments remain substantial. When such payments involve expenditures above some given proportion of household resources, they are often deemed 'catastrophic'. The research literature on defining catastrophe leaves open a number of important questions and as a result there still exists a lack of consensus on the issue. This paper argues that there is a need to examine the question of what might constitute fair indices of catastrophic payment, which explicitly recognize diminishing marginal utility of income as reflected in some principle of vertical equity. It proposes the use of rank-dependent weights to allow variations in threshold payment levels across individuals on the income ladder. These are then applied to a Nigerian data set. It emerged that the catastrophic headcount (positive gap) obtained using a fixed threshold - weighted or not by the concentration index - is lower (higher) than that predicted by the rank-dependent threshold. More fundamentally there is a need for more research effort to take the ideas in this paper further and examine in various different contexts what a fair construct of catastrophe might look like.

How does cost matter in health-care discrete-choice experiments?

Willingness-to-pay (WTP) estimates derived from discrete-choice experiments (DCEs) generally assume that the marginal utility of income is constant. This assumption is consistent with theoretical expectations when costs are a small fraction of total income. We analyze the results of five DCEs that allow direct tests of this assumption. Tests indicate that marginal utility often violates theoretical expectations. We suggest that this result is an artifact of a cognitive heuristic that recodes cost levels from a numerical scale to qualitative categories. Instead of evaluating nominal costs in the context of a budget constraint, subjects may recode costs into categories such as 'low', 'medium', and 'high' and choose as if the differences between categories were equal. This simplifies the choice task, but undermines the validity of WTP estimates as welfare measures. Recoding may be a common heuristic in health-care applications when insurance coverage distorts subjects' perception of the nominal costs presented in the DCE instrument. Recoding may also distort estimates of marginal rates of substitution for other attributes with numeric levels. Incorporating 'cheap talk' or graphic representation of attribute levels may encourage subjects to be more attentive to absolute attribute levels.

Context and the VSL: Evidence from a Stated Preference Study in Italy and the Czech Republic

We report on the results of a survey based on conjoint choice experiments that was specifically designed to investigate the effect of context on the Value of a Statistical Life (VSL), an important input into the calculation of the mortality benefits of environmental policies that reduce premature mortality. We define “context” broadly to include (1) the cause of death (respiratory illness, cancer, road traffic accident), (2) the beneficiary of the risk reduction (adult v. child), and (3) the mode of provision of the risk reduction (public program v. private good). The survey was conducted following similar protocols in Italy and the Czech Republic. When do not distinguish for the cause of death, child and adult VSL are not significantly different from one another in Italy, and the difference is weak in the Czech sample. When we distinguish for the cause of death, we find that child and adult VSLs are different at the 1% level for respiratory illnesses and road-traffic accidents, but do not differ for cancer risks. We find evidence of a “cancer premium” and a “public program premium.” In both countries, the marginal utility of income is about 20% lower among wealthier people, which makes the VSL about 20% higher among respondents with incomes above the sample average. The discount rate implicit in people’s choices is effectively zero. We conclude that there is heterogeneity in the VSL, and that such heterogeneity is primarily driven by risk characteristics mode of delivery of the risk reduction, and income, while other individual characteristics of the respondent (e.g., age and education) are less important. For the most part, our results are in agreement with environmental policy analyses that use the same VSL for children and adults, and that apply a cancer premium.

Commodity Taxation under Habit Formation and Myopia

Abstract This paper analyzes the pattern of consumption taxes in a two period model with habit formation and myopia. An individual’s second-period needs increase with first period consumption. However, myopic individuals do not see this habit formation relation when they take their saving decision. The first-best solution is decentralized by a simple “Pigouvian” (paternalistic) consumption tax (along with suitable lump-sum taxes). In a second-best setting, when personalized lump-sum transfers are not available, consumption taxes may have conflicting paternalistic and redistributive effects. Taxes should discourage consumption of goods that entail negative externalities (unforeseen habits), but instead they discourage less the consumption of goods that are proportionately consumed by individuals with high net social marginal utility of income. Both myopic and farsighted individuals may benefit more from the second-best policy as the proportion of myopic agents in society increases.

Context and the VSL: Evidence from a Stated Preference Study in Italy and the Czech Republic

We report on the results of a survey based on conjoint choice experiments that was specifically designed to investigate the effect of context on the Value of a Statistical Life (VSL), an important input into the calculation of the mortality benefits of environmental policies that reduce premature mortality. We define “context” broadly to include i) the cause of death (respiratory illness, cancer, road traffic accident), ii) the beneficiary of the risk reduction (adult v. child), and iii) the mode of provision of the risk reduction (public program v. private good). The survey was conducted following similar protocols in Italy and the Czech Republic. When we do not distinguish for the cause of death, child and adult VSL are not significantly different from one another in Italy, and the difference is weak in the Czech sample. When we distinguish for the cause of death, we find that child and adult VSLs are different at the 1% level for respiratory illnesses and road-traffic accidents, but do not differ for cancer risks. We find evidence of a “cancer premium” and a “public program premium.” In both countries, the marginal utility of income is about 20% lower among wealthier people, which makes the VSL about 20% higher among respondents with incomes above the sample average. The discount rate implicit in people‘s choices is effectively zero. We conclude that there is heterogeneity in the VSL, and that such heterogeneity is primarily driven by risk characteristics and mode of delivery of the risk reduction, rather than by individual characteristics of the respondent (e.g., income and education). For the most part, our results do not disagree with environmental policy analyses that use the same VSL for children and adults, and that apply a cancer premium.

The effect of children on adult demands for health-risk reductions

We examine patterns in adults’ willingness to pay for health-risk reductions. We allow both their marginal utilities of income and their marginal disutilities from health risks to vary systematically with the structures of their households. Demand by adults for programs which reduce their own health risks is found to be influenced by (1) their parenthood status, (2) the numbers of children in different age brackets currently in their households, (3) the ages of the adults themselves, (4) the latency period before they would fall ill, and (5) whether there will still be children in the household at that time. For younger adults, willingness to pay by parents is greater than for non-parents, and increases with each additional young child. For middle-aged adults, willingness to pay for corresponding risk reductions falls when teenagers are present and falls further with each additional teenager in the household.

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Trade and the Distribution of Human Capital

We develop a two-country, two-sector model of trade where the only difference between the two countries is their distribution of human capital endowments. We show that even if the two countries have identical aggregate human capital endowments the pattern of trade depends on the properties of the two human capital distributions. We also show that the two distributions of endowments also completely determine the effects of trade on income inequality. Then, we prove that there are long-term gains from trade if the marginal utility of income is constant or as long as losers from trade are compensated by winners. Finally, we look at a simple majority voting model. It turns out depending on the distribution of human capital, autarky and free trade with and without compensation may be the outcome of majority voting.

Trade and Child Labor: A General Equilibrium Analysis

This paper augments the existing literature on trade and child labor by exploring the effects of terms of trade changes in the context of a three good general equilibrium model, where one of the goods is a non-traded good. We find that under quasi-linear preferences the effect of the terms of trade on child labor depends critically on the pattern of substitutability (or complementarity) in the excess demand functions between the export good and the non-traded good. We extend the analysis to the case of homothetic preferences and find that the basic result is somewhat modified in a context where the marginal utility of income is affected by the terms of trade. We also extend the analysis to the case where factors move freely between the three goods as in a Heckscher-Ohlin type framework. Finally, we show that a balanced budget policy of taxing the education of skilled families and subsidizing the education of unskilled families must reduce child labor without any impact on aggregate welfare.

Nonpecuniary Benefits to Farming: Implications for Supply Response to Decoupled Payments

AbstractWe develop a household model wherein farmers allocate labor to maximize utility from leisure, consumption, and nonpecuniary benefits from farming. The model shows that farmers with decreasing marginal utility of income respond to higher decoupled payments by decreasing off‐farm labor and increasing farm labor, resulting in greater agricultural output. We then estimate the difference between farm and off‐farm returns to labor using data from three nationally representative farm household surveys. The finding of a large on‐farm/off‐farm wage differential provides compelling evidence of substantial nonpecuniary benefits from farming.