influence on both the welfare effects of the health outcome as well as optimal levels
of insurance.
One possibility is that the adverse health effect does not alter the structure of utility
functions and is equivalent to a monetary loss l. Then in our binary outcome model,
the utility function for the injured or ill health state is
In this instance, after the injury for any given income level y, the individual has a higher
marginal utility of income than before the injury because the injury is equivalent to a
drop in income. With this formulation, full insurance at actuarially fair rates is efficient.
With that level of insurance, ...
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