THE TIME TRADE-OFF - A NOTE ON THE EFFECT OF LIFETIME REALLOCATION OFCONSUMPTION AND DISCOUNTING

This paper considers the extent to which responses to time trade off ( TTO) questions can provide unbiased estimates of ratios of individual marginal rates elf substitution (MRS) of wealth for risk of various he alth state impairments relative to the corresponding MRS for risk of d eath. It is shown that if there is reallocation of lifetime consumptio n and/or discounting of future utilities, then a TTO response that is not adjusted for these effects will unambiguously overestimate the rat ios of individual MRS. While the effect of reallocation is likely to b e very small, discounting can lead to significant overestimation, the magnitude of which depends in part upon the severity of the health sta te impairment. (C) 1997 Elsevier Science B.V.