What Good is Wealth Without Health?

IPR economist Matthew Notowidigdo offers new use of "happiness" measures

money and pills
People with worse health gain less satisfaction from purchasing goods or services

Can a person’s health affect his or her economic decisions, such as purchasing insurance or saving for retirement? In their award-winning journal article, IPR economist Matthew Notowidigdo, MIT’s Amy Finkelstein, and Dartmouth’s Erzo Luttmer use a novel approach that incorporates measures of subjective well-being, or “happiness,” to examine the effects of changes in health.

Matthew Notowidigdo

The researchers drew on panel data from the Health and Retirement Study, a representative sample of Americans over the age of 50 that includes questions on income, health, and happiness. They used the happiness data—specifically, people’s agreement or disagreement with the question, “Much of the time during the past week I was happy”—as a proxy for “utility,” or a person’s overall level of satisfaction.

Notowidigdo and his colleagues find that across the board, people with worse health report less satisfaction when buying goods or services. They also find that for wealthier people, happiness declines more when their health worsens, as compared with lower-income individuals. The researchers interpret these findings as evidence that marginal utility—the incremental gain in happiness from extra income or more consumption—is higher for the healthy.

The researchers suggest there’s a lesson here for health insurers, who could potentially reduce reimbursements for medical expenses. That way, people would have more to spend on other things besides high insurance premiums when they are healthy—and receive more satisfaction from such spending. When they become sick, on the other hand, they would pay more out-of-pocket for their healthcare, but as this research shows, they would derive less happiness from spending their money elsewhere in any case.

The researchers hope their paper will lead to further work on health and marginal utility, including examining the impact of specific chronic diseases on marginal utility and exploring these same connections in young people.

Notowidigdo also offers that the use of such happiness data could better inform economic research.

“I think the use of happiness data is part of a trend in economics towards actually talking to the subjects that we’re studying,” Notowidigdo said in a recent video about the article. “I’d like to think our paper is part of a trend toward the careful use of subjective data in all fields of economics.”

Matthew Notowidigdo is an associate professor of economics and an IPR fellow. The article “What Good is Wealth Without Health? The Effect of Health on the Marginal Utility of Consumption” was published in the Journal of the European Economic Association and received the association’s 2014 Hicks-Tinbergen Award.

Photo credit: Sara Kupper