Hugonnier, Julien, Florian Pelgrin and Pascal St-Amour (2017), “Valuing Life at Gunpoint, or as a Statistic, or both” (preliminary), Faculty of Business and Economics (HEC), University of Lausanne, (paper).
- Abstract: We calculate, and estimate closed-form expressions for the value of life at gun- point, i.e. the maximal amount an individual would be willing to pay to avert certain death, as well as for alternative life valuation (Value of Statistical Life, VSL). Our estimates show that marginal valuation of life diminishes rapidly in incremental death risk. Consequently, linear extrapolation under VSL overestimates how much to pay to avert one’s own death, and confirm that the VSL is best interpreted as a collective willingness to pay to avert an infinitesimal risk increase, and not as a value attributed to one’s own life.
Hugonnier, Julien, Florian Pelgrin and Pascal St-Amour (2017), “Closing Down the Shop: Optimal Health and Wealth Dynamics near the End of Life”, Faculty of Business and Economics (HEC), University of Lausanne, (paper).
- Abstract: Health declines, and mortality risk increases rapidly near the end of life. Cura- tive care expenses stagnate, while long-term care spending increases, accelerating the fall in wealth. Standard explanations emphasize inevitable health deteriorations associated with aging. We propose a closing down the shop alternative where agents’ decisions affect their health, and the timing of death. Despite strictly preferring to live, agents optimally deplete their health and wealth statuses towards levels associated with high death risk and indifference between life and death. Using HRS data for agents over 65, a structural estimation of the closed-form decisions induced by the model identifies and tests conditions for these strategies to be optimal, and confirm their economic relevance near the end of life.
Mesquida, Yannis, and Pascal St-Amour (2016), “Joint Lifetime Financial, Work, and Health Decisions: Thrifty and Healthy Enough for the Long Run?”, manuscript, Faculty of Business and Economics (HEC), University of Lausanne, (paper).
- Abstract: Lifetime financial-, work- and health-related decisions made by agents are inter- twined with one another. Understanding how these decisions are made is essential to gauge if saving in financial, retirement and human assets is adequate or not. This paper numerically solves, simulates, and structurally estimates a dynamic life cycle model of allocations (consumption/savings, leisure/work and health expenditures), statuses (health, financial and pension wealth) and welfare, allowing for (partially) adjustable exposure to morbidity and mortality risks. Using the simulated life cycle variables as benchmark, our results show that observed choices are not fully consistent with an optimal, forward-looking strategy. Whereas financial savings and pension claims are both adequate, individuals in the data are not healthy enough, and consequently face a shorter life horizon than expected. Moreover, full insurance, and age-increasing wages would optimally point to more spending and less leisure to maintain health than currently observed. As a consequence, observed post-retirement income is too low, and explains a sharp drop in consumption after 65 that is inconsistent with optimizing behavior. Relaxing assumptions on full insurance and pension regimes only partially alleviates these discrepancies.
Hugonnier, Julien, Florian Pelgrin and Pascal St-Amour (2016), “Self-Inflicted Unemployment Scarring, and Stigma”, Faculty of Business and Economics (HEC), University of Lausanne, (paper).
- Abstract: Long-term scars of unemployment include higher ex-post displacement, and income losses, as well as lower re-employment for longer unemployment spells (stigma). Human capital explanations assume it increases wages, and re-employment, and decreases displacement risk, but rely on tenure-based and/or employer decided acquisition only. We consider an alternative where investment decisions are made by workers, allowing for displacement and re-employment risks hedging, and assuming that the investment technology is independent of the employment status. We calculate analytically the joint optimal investment by the employed and the unemployed. We identify two dynamically stable steady-state values with a lower one for the unemployed generating cyclical dynamics whereby human capital optimally falls during unemployment spells, and increases again upon re-employment. It follows that scarring and stigma are endogenously generated as a by-product of decisions made by agents, and are therefore self-inflicted. We close the analysis by a counter- factual exercise allowing to gauge and confirm the importance of employment risks hedging in total demand for human capital, and that of moral hazard issues in the design of UIB programs.