Willingness to pay for morbidity and mortality risk reductions during an epidemic. Theory and preliminary evidence from
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Willingness to pay for morbidity and mortality risk reductions during an epidemic. Theory and preliminary evidence from COVID‑19 Luciana Echazu1 · Diego C. Nocetti2 Received: 15 May 2020 / Accepted: 31 July 2020 © International Association for the Study of Insurance Economics 2020
Abstract The COVID-19 pandemic and the strong social distancing measures adopted by governments around the world provide an ideal scenario to evaluate the trade-off between lives saved and morbidity avoided on the one hand and reduced economic resources on the other. We adapt the standard model of willingness to pay (WTP) for mortality/ morbidity risk reductions by incorporating a number of aspects that are highly relevant during an epidemic; namely, health-care capacity constraints, dynamic aspects of prevention (i.e., interventions aimed at flattening the epidemic curve), and distributional issues due to high heterogeneity in the underlying risks. The calibration of the model generates a WTP of the order of 24% of GDP. We conclude that the benefits in terms of lives saved and morbidity avoided can well justify the enormous economic costs generated by social distancing interventions. There is, however, significant that heterogeneity in WTP estimates depending on the degree of vulnerability to infection risk (e.g., by age), implying a large redistribution of income and well-being. Keywords Willingness to pay · Value of statistical injury · COVID-19 pandemic · Health-care capacity constraints
1 Introduction As a result of the ongoing coronavirus (COVID-19) pandemic, individuals and governments around the world are undertaking strong actions to prevent the rapid spread of the disease and potentially millions of deaths, including school and * Diego C. Nocetti [email protected] Luciana Echazu [email protected] 1
Peter Paul College of Business and Economics, University of New Hampshire, Durham, NH, USA
2
David D. Reh School of Business, Clarkson University, Potsdam, NY, USA
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The Geneva Risk and Insurance Review
universities closures, stay-at-home mandates, and even lock downs of entire cities. These actions generate a steep cost in terms of reduced economic activity, millions of lost jobs, worse educational outcomes for children, psychological stress, reduced health-care resources for other medical conditions, and many others. The evaluation of the costs and benefits of preventing fatalities and/or non-fatal injuries has a long history in economics [See Viscusi (2014) for a recent treatment]. To capture the trade-off between economic resources and human lives saved, economists typically calculate the value of statistical life (VSL): The amount that individuals are willing to pay for an intervention that marginally reduces mortality risk, per unit of risk. Similarly, the value of statistical injury (VSI) represents the amount that individuals are willing to bear to reduce the risk of an injury or a disease, per unit of risk. The COVID-19 pandemic and the measures adopted provide an ideal scenario to appl
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