NBER Disability Research Center

NB13-11, State-Dependent Utility and Insurance Purchase Decisions

Jeffrey Brown, University of Illinois, Urbana-Champaign and NBER
Gopi Shah Goda, Stanford University and NBER
Kathleen McGarry, UCLA and NBER

Most standard economic models that assess the value of insurance assume that consumers have a utility function that does not vary across sick and healthy states. Yet there is some evidence to support the notion that individuals who suffer health shocks – such as a disability that interferes with work while young or that leads to long-term care when old – may value consumption goods differently than they would if they remained healthy. If utility is indeed “state dependent,” there may be important consequences for insurance demand. Put simply, if people value a marginal dollar less (more) when disabled than when healthy, they will value disability insurance less (more). This project will use a novel survey approach to determine whether cross-sectional variation in the extent of state dependence can explain the variation in individual demand for insurance products such as supplemental disability insurance or long-term care insurance. These results will not only help us to understand better the determinants of private sector disability insurance, but will also help us to assess more accurately the individual welfare consequences of the Social Security disability program and how the welfare effects vary across the population.