Disability and Marginal Utility of Income

Abstract

It is often assumed that disability lowers the marginal utility of income. In this article individuals’ marginal utility of income in two states, (1) paralyzed in both legs from birth and (2) not mobility impaired at all, are measured through experimental choices between imagined lotteries behind a so-called “veil of ignorance”. The outcomes of the lotteries include both income and disability status. It is found that most people have higher marginal utility when paralyzed than when not mobility impaired at all. The median ratio of the two marginal utilities is estimated at between 1.16 and 1.92. The two marginal utilities are evaluated at the same levels of income. Quite little of the heterogeneity in this ratio can be explained by socio-economic background, but having personal experience of mobility impairment and supporting the Left party, the Social democratic party, the Green party or the Liberal party are associated with having a high ratio. The results suggest, in contrast to e.g. Finkelstein et al. (2008) and Viscusi and Evans (1990) that more than full insurance of income losses connected to being disabled is optimal. The results further suggests, in contrast to e.g. Sen (1997) and Roemer (1985, 1996, 2001), that given a utilitarian social welfare function resources should be transferred to, rather than from, disabled people. Finally, if the transfers are not large enough to smooth out the marginal utilities of the disabled and the non-disabled, distributional weights based on disability status (in opposite to income) should be used in cost-benefit analysis.