Working Paper: NBER ID: w25055
Authors: Daniel Bauer; Darius Lakdawalla; Julian Reif
Abstract: We develop a new framework for valuing health and longevity improvements that departs from conventional but unrealistic assumptions of full annuitization and deterministic health. Our framework can value the prevention of mortality and of illness, and it can quantify the effects of retirement policies on the value of life. We apply the framework to life-cycle data and generate new insights absent from the conventional approach. First, treatment is up to five times more valuable than prevention, even when both extend life equally. This asymmetry helps explain low observed investment in preventive care. Second, severe illness can significantly increase the value of statistical life, helping to reconcile theory with empirical findings that consumers value life-extension more in bleaker health states. Third, retirement annuities boost aggregate demand for life-extension. We calculate that Social Security adds $10.6 trillion (11 percent) to the value of post-1940 longevity gains and would add $127 billion to the value of a one percent decline in future mortality.
Keywords: Mortality risk; Insurance; Value of life; Health economics
JEL Codes: H51; H55; I10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sick individuals (I12) | Value of Statistical Illness (VSI) (J17) |
| Negative health shock (I12) | Value of Statistical Life (VSL) (J17) |
| U.S. social security program (H55) | Value of post-1940 longevity gains (J17) |
| Health shocks (I12) | Willingness to pay for life-extension (J17) |
| Incomplete annuitization (G22) | Valuation of treatment compared to prevention (J17) |