Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 152: On the Value of Changes in Life Expectancy: Blips versus Parametric Changes

Magnus Johannesson (), Per-Olov Johansson () and Karl-Gustaf Löfgren
Additional contact information
Magnus Johannesson: Department of Economics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden
Per-Olov Johansson: Department of Economics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden
Karl-Gustaf Löfgren: Dept. of Economics, University of Umeå

Abstract: Previous studies indicate that the general public would prefer to reallocate medical resources from old people to young ones, and also has a low WTP for measures that increase the survival probability at an advanced age. In this paper, we present an analysis of the value of a ‘blip’, i.e. an immediate small reduction, in the hazard rate for a random sample of Swedes. Since the risk reduction is age-independent (2 ‘extra saved lives’ out of 10,000 during the next year), we can examine how the WTP and the implied value of a statistical life vary with age. We also show how blip data can be used to obtain a lower bound for the value of a parametric, i.e. permanent, change in an individual’s hazard rate. This approach avoids asking respondents to perform the tricky task of estimating, for example, their entire future survival and income paths, a task which is necessary in order to estimate the WTP for a change lasting over their remaining life cycle. The estimated willingness to pay as well as the implied value of a statistical life are very reasonable, The value of life exhibits an inverted-U shape with respect to age, peaking at the age of 40, and falls in the $3 to $7 million interval where most reasonable estimates are clustered according to Viscusi’s (1992) survey.

Keywords: Willingness to pay; insurance; life expectancy; statistical life; ageing

JEL-codes: I10; I31; D10; H43

23 pages, January 1997

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