DISABILITY AND MARGINAL UTILITY OF INCOME: EVIDENCE FROM HYPOTHETICAL CHOICES

It is often assumed that disability reduces the marginal utility of income. In this article, individuals' marginal utility of income in two states—(i) paralyzed in both legs from birth and (ii) not mobility impaired at all—is measured through hypothetical choices between imagined lotteries behind a so‐called veil of ignorance. The outcomes of the lotteries include both income and disability status. It is found that most people have higher marginal utility when paralyzed than when not mobility impaired at all. The two marginal utilities are evaluated at the same levels of income. Having personal experience of mobility impairment and supporting the Left Party, the Social Democratic Party, the Green Party, or the Liberal Party are associated with having a higher marginal utility when paralyzed. The results suggest that more than full insurance of income losses connected to being disabled is optimal. The results further suggest that, given a utilitarian social welfare function, resources should be transferred to rather than from disabled people. Finally, if the transfers are not large enough to smooth out the marginal utilities of the disabled and the nondisabled, distributional weights based on disability status should be used in cost–benefit analysis. Copyright © 2013 John Wiley & Sons, Ltd.