# Income–Well‐Being Gradient in Sickness and Health

## TL;DR

This paper studies how income affects well-being differently when people are sick versus healthy, using German survey data.

## Contribution

The paper introduces a new method to estimate the value of insurance by modeling marginal utility differences in sickness and health.

## Key findings

- Higher marginal utility of income is observed in sick states compared to healthy states.
- The study estimates the value of sickness insurance for optimal policy calculations.

## Abstract

We propose a method for studying the value of insurance. For this purpose, we analyze the well‐being of the same individuals, comparing sick and healthy years, using German panel survey data on life satisfaction. We impose structure on the income–well‐being gradient by fitting a flexible utility function to the data, focusing on the differences in marginal utility in the sick and the healthy states. Notably, our empirical specification allows for a “fixed cost of sickness.” We find a higher marginal utility of income in the sick state. We use our estimates to gauge the value of sickness insurance for Baily‐Chetty–type optimal policy calculations.