Cordoba, Juan Carlos; Ripoll, Marla

WP #12002, March 2012

Life expectancy around the world has increased substantially since 1970. In contrast, consump-tion per capita has fallen in some countries, remained stagnant, or sharply increased in others.What are the welfare gains of the systematic increase in life expectancy around the world? Howdoes a "full measure" of per capita income, one that adjusts for life expectancy, compare tostandard measures of world inequality that only consider income? This paper documents howstandard models used to answer these questions give rise to a number of predictions that areinconsistent with well-documented evidence, particularly on the value of statistical life. It thenproposes a generalized model with non-separable preferences that exhibits a low elasticity ofintertemporal substitution and a low degree of mortality aversion. The non-separable modelreverts the counterfactual predictions of the standard model, and it also provides plausiblemeasures of changes in welfare and inequality around the world.

JEL Classification: D, J

Keywords: Welfare, life expectancy, value of statistical life, mortality risk aversion, Epstein-Zin-Weil pref- erences, AIDS.

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