When Money Matters More: Long‐Term Illness and the Income/Life Satisfaction Slope

• Published date: 01 September 2021
• Author: Leonardo Becchetti,Fabio Pisani
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/roiw.12485

© 2020 International Association for Research in Income and Wealth

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WHEN MONEY MATTERS MORE: LONG-TERM ILLNESS AND THE

INCOME/LIFE SATISFACTION SLOPE

by Leonardo becchetti and Fabio Pisani*

University of Rome Tor Vergata

We compare the life satisfaction of individuals aged above 50years reporting or not reporting long-term

illnesses. Our econometric findings show that the positive income/life satisfaction gradient is steeper for

individuals with at least one long-term illness, especially those lacking private insurance or reporting

above mean unmet medical needs. We also use the compensating variation approach and show that

the marginal utility of income (net of the absolute and relative income effects) for the long-term ill is

significantly larger than the average marginal utility of income in the sample.

JEL Codes: I10, I18, I31

Keywords: health and life satisfaction, income/life satisfaction slope, value of health

1. introduction

The literature on subjective wellbeing has grown considerably in recent decades

because of several concurring factors. First, policymakers are becoming increas-

ingly interested in these indicators since they capture information on the public

appraisal of their action that is unobservable using traditional objective indicators.

They have, therefore, started looking at life satisfaction and life sense surveys, as

corporations do with customer satisfaction surveys and employers with job sat-

isfaction surveys to monitor consumers’ appraisal and the work climate in their

companies, respectively. Second, economists have started employing econometric

findings on the determinants of subjective wellbeing in multivariate analysis as a

basis for calculating the value of non-market goods using the compensating vari-

ation approach. Such information is hugely relevant for cost/benefit analysis and

policymaking more generally. For example, this approach has been used in health

economics to calculate the value of non-market goods such as cardiovascular dis-

eases (Groot and Van den Brink, 2006), a wide range of illnesses for East and West

Germans (Ferrer-i-Carbonell and Van Praag, 2002), the cost of child disability in

the United Kingdom (Melnychuk et al., 2018), and the cost of caring for informal

caregivers (Mentzakis et al., 2010). Third, subjective wellbeing indicators matter

because they influence people’s choices during their lives and, consequently, are

objective indicators. Along this line, poor job satisfaction has been shown to be a

good predictor of employment status, productivity, and the likelihood of changing

*Correspondence to: Fabio Pisani, Department of Economics and Finance, University of Rome

Tor Vergata, Rome, Italy (fabio.pisani@uniroma2.it).

Review of Income and Wealth

Series 67, Number 3, September 2021

DOI: 10.1111/roiw.12485

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Review of Income and Wealth, Series 67, Number 3, September 2021

617

© 2020 International Association for Research in Income and Wealth

or quitting one’s job (Judge, 1992; Staw and Barsade, 1993; Judge et al., 2001).

Fourth, a poor sense of life (low eudaimonic wellbeing) has been shown to be a

significant mortality risk factor (Becchetti et al., 2018), whereas low self-assessed

health is a good predictor of mortality (Idler and Angel, 1990; McCallum et al.,

1994; Idler and Kasl, 1995; Appels et al., 1996; Benjamins et al., 2004) and chronic

illness (Bachelet et al., 2017).

Our study contributes to the literature by investigating the relationship between

income and life satisfaction conditional on long-term illness status. Our descriptive

findings show, as expected, that reporting at least one long-term illness is associated

with a significantly worse distribution of life satisfaction in the population. Based

on this descriptive evidence, we econometrically test the income–life satisfaction

nexus and find that the interaction between long-term illness status and being in

the top 30 percent income group is significantly correlated with life satisfaction,

net of the standalone impact of the two interacting variables. To inspect more in

depth the relationship between income and life satisfaction along the income dis-

tribution without imposing a functional form, we use income deciles. We find that

the income/life satisfaction slope is significantly steeper for individuals with at least

one long-term illness and, within this group, for those reporting unmet needs of

medical examination due to travel costs, the costs of medical treatment, or waiting

times. In addition, within the long-term ill subsample, the relationship is steeper for

respondents not having complementary private insurance.

Our results add to this strand of the literature by explaining the heterogeneity

in the aggregate data used so far in this debate, since we show that the relation-

ship between income and life satisfaction is significantly steeper when individuals

record at least one long-term illness. We argue that the observed heterogeneity in

the income/life satisfaction gradient has relevant effects on the overall population

gradient usually investigated in the literature, given that the long-term illness group

accounts for almost half of the respondents in our representative sample of 20 EU

countries as well as progressive population ageing in high-income countries.

From a different perspective, our study contributes to the literature by inves-

tigating the marginal utility of income and consumption, where the standard

assumption is generally that of state independence (i.e. independence from health

conditions) (e.g. Feldstein, 1973; Feldman and Dowd, 1991; Mitchell et al., 1999;

Davidoff et al., 2005; Golosov and Tsyvinski, 2006; Brown and Finkelstein, 2008).

Empirical analysis on this point is relevant given that the impact of poor health on

the marginal utility of consumption is theoretically ambiguous (Finkelstein et al.,

2009). On the one hand, individuals with poor health have reduced time horizons

and possibilities of access to certain consumption goods (e.g. traveling); therefore,

their utility of income may fall. On the other hand, they require expensive care,

and, therefore, the utility of consumption (and of income) may grow. Previous

empirical contributions have used approaches such as survey measures of self-

reported compensating income differentials to hypothetical health risks (Sloan

et al., 1988; Evans and Viscusi, 1990; Viscusi and Evans, 1990). The problem with

these approaches is that they require respondents to forecast the shape of their

utility function in an unbiased manner (Finkelstein et al., 2009), while they may

presumably underestimate their income needs when ill. To avoid this problem,