Income-Well-Being Gradient in Sickness and Health

We propose a method for studying the value of insurance. For this purpose, we analyze the well-being of the same individuals, comparing sick and healthy years, using German panel survey data on life satisfaction. We impose structure on the income-well-being gradient by fitting a flexible utility function to the data, focusing on the differences in marginal utility in the sick and the healthy states. Notably, our empirical specification allows for a "fixed cost of sickness." We find a higher marginal utility of income in the sick state. We use our estimates to gauge the value of sickness insurance for Baily-Chetty-type optimal policy calculations.