Essays on impact of risk preference on health and occupational choice

Abstract

This dissertation re-examines Health and Retirement Study (HRS) data in order to ascertain whether there exists behavioral heterogeneity among people regarding health risk as compared to that of financial risk as well as whether there exists racial-ethnic and gender heterogeneity in the health state dependence of marginal utility. Given heterogeneous risk and time preferences of individuals, this study investigates the impact of those preferences on sorting into occupations and industries using various measures of job risk. I construct three measures of risk across jobs, cross-categorized by occupation and industry: a fatal injury rate, non-fatal injury and illness rate, and a measure of inter-person income variability. Using these measures, I analyze how risk and time preference of an individual affects his occupational choice. This study finds that there are different domains of risk and that individuals do not think of these in the same way. Using Health and Retirement Study data, I find that there exists a behavioral inconsistency in health risks versus income risk. This dissertation advises against the use of health risk proxy for making inferences about financial risk. This dissertation then examines the heterogeneity in health dependence of utility and contingent upon the findings of heterogeneity, it examines the factors contributing to utility heterogeneity. To examine this empirically, I begin with theoretical and empirical models used by Finkelstein, et al. (2011) relaxing the assumptions of those models to allow for differential effects by race, gender and ethnicity. Using happiness as a utility proxy and objective health measures in our baseline model, I find strong evidence of heterogeneity in health state dependence of utility among males and females, hispanic and non-hispanic and white, and black; not only in seven objective health conditions but also functionality limitations; not only by using happiness as a utility proxy but also with CES-D score. Since, there is slight evidence of heterogeneity in the health state dependence of utility among different health states, the policies like Medicare, and Medicaid would have varying impact on people depending upon race, ethnicity and gender. The non-linear B-O decomposition of utility unfolds that the significant contributors towards the explained gender, racial and ethnic gap in utility proxy (happiness and CES-D Score) are: marital status, number of diseases, log adjusted income, risk attitudes and ethnicity. Approximately 80 percent of the gender utility gap and 100 percent race utility gap is explained by the endowment effect. Thus, this dissertation reaffirms the findings of Halliday (2008) that there may be larger potential gains to identifying as well as targeting factors that influence individual heterogeneity since the health state dependence of utility is mostly driven by individual characteristics, as has been found to be the case in B-O decomposition of utility in the current study.

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