The effect of health on the marginal utility of consumption: Evidence based on household consumption expenditure

Abstract

This study uses broad-based measures of household consumption and a utility proxy to estimate the effect of health on the marginal utility of consumption, utilizing data from the Russia Longitudinal Monitoring Survey (1994–2019). To do so, I estimate how an observed within-individual utility change associated with a health shock varies across individuals of different consumption levels. The results indicate that the marginal utility of consumption increases as health deteriorates. Specifically, the baseline estimates show that moving from a healthy state to a poor health state raises the marginal utility of consumption by approximately 4 percentage points. In relative terms, a one-standard-deviation increase in poor health is associated with a proportional increase of 22.7% to 29.4% in the marginal utility of consumption relative to the marginal utility in a healthy state. These findings are primarily driven by the increased marginal utility of luxuries rather than necessities, suggesting that certain types of goods offer greater utility in poor health and play a crucial role in mitigating the adverse impacts of health shocks.