The Subjective Well-Being Method of Valuation: An Application to General Health Status

To introduce the subjective well-being (SWB) method of valuation and provide an example by valuing health status. The SWB method allows monetary valuations to be performed in the absence of market relationships.

Data are from the 1975-2010 General Social Survey.

The value of health status is determined via the estimation of an implicit derivative based on a happiness equation. Two-stage least-squares was used to estimate happiness as a function of poor-to-fair health status, annual household income adjusted for household size, age, sex, race, marital status, education, year, and season. Poor-to-fair health status and annual household income are instrumented using a proxy for intelligence, a temporal version of the classic distance instrument, and the average health status of individuals who are demographically similar but geographically separated. Instrument validity is evaluated.

Moving from good/excellent health to poor/fair health (1 year of lower health status) is equivalent to the loss of $41,654 of equivalized household income (2010 constant dollars) per annum, which is larger than median equivalized household income.

The SWB method may be useful in making monetary valuations where fundamental market relationships are not present.