Ministry of Finance's value of a statistical life

The monetization of well-being effects in the value bank is based on existing experience with valuation in other contexts, and follows Frijters & Krekel's [1] approach to valuing the unit WELLBY. They use the well-established measure QALY (quality adjusted life years) and examine what it corresponds to in number of WELLBYs - i.e. how many WELLBYs correspond to one quality-adjusted life year. The monetized value of a QALY can then be used to value a WELLBY. 

The UK Treasury shows that a QALY is associated with a 7 point change in life satisfaction (going from 8 to 1)[2]. In Denmark, we do not have a monetary value for a QALY. The Danish Ministry of Finance has valued the "Value of a life year" - a VOLY, which is based on the value of a statistical life[3]. The UK Treasury has chosen to value a QALY and a VOLY the same, so one VOLY equals one QALY[4]. Based on this, it is assumed that the Danish VOLY value can be used to value our WELLBY. In 2021, the Danish Ministry of Finance valued the value of one year of life, one VOLY, at DKK 1.3 million per year[5].

Based on these assumptions, we can derive a Danish value for one point of life satisfaction.

Value of a WELLBY =VOLY/(8-1)=1,300,000 kr./(8-1)=185,714 kr. (2021 prices)

A one-point change on the life satisfaction scale is thus assigned a value of DKK 186,000 per person per year (2021 prices).

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Multiple approaches to monetization

Open Social Value Bank follows the dominant part of the literature, which primarily focuses on quantifying and monetizing subjective well-being through life satisfaction. Monetization is done by establishing a willingness to pay for well-being or life satisfaction. We thus need to be able to estimate how large an amount of money (typically captured in income) can create the same change in subjective well-being as a change in a specific social parameter, or how much society is willing to pay for this change. 

The fundamental challenge when we want to monetize is that income is very likely to be endogenous. For example, previous literature has shown that individuals who feel happier or more satisfied later have higher wages. Research has attempted to address this challenge by exploiting various exogenous changes in income (lottery winners, large sudden income shifts), and the results show relatively large differences in the resulting income coefficients. The Green Book suggests that the main sources of this variation in income coefficients are endogeneity in the statistical model, how aware individuals are of income changes, whether the effect is short- or long-term, and whether gains or losses in income are taken into account[2]. 

This challenge and complexity is inevitable and can lead to many discussions and uncertainties. 

In the UK, the WELLBY unit has previously been valued via regression analysis of observational data, or using quasi-experimental approaches such as using lottery winners as instrument variables. However, there are a number of limitations associated with these approaches, including that regression analysis cannot establish a clear direction of causality or that there are problems with selection bias, while the instrument-variable approach has some limitations in terms of external validity.

Currently, two main approaches are used to value a WELLBY unit in England. One approach is based on the value already used in the National Health Service (NHS) for one QALY unit (£60,000), which is then converted to WELLBY (≈£10,000). The second approach is based on the value of one WELLBY (≈£16,000) being set via Discrete Choice Experiments and an analysis of the relationship between income and life satisfaction. Choice experiments have been used for years to value goods and services that do not normally have a market value. The novelty of choice experiments in social valuation is that they use life satisfaction as the primary outcome and can identify the relationship with income and different life situations and conditions. One of the strengths of choice action experiments is that the experiment can be randomized and the values identified are therefore considered causal. The UK Treasury Green Book uses the middle value of the results for the two methods, i.e. £13,000 (£10,000; £16,000). 

Open Social Value Bank is open to working exploratively with monetization by testing different approaches. In doing so, we believe that this is the best way to build consensus around the Danish valuation. Specifically, it is proposed to test three approaches, each with advantages and disadvantages.

• Alignment with existing valuations
• Regression analysis of observational data
• Electoral experiment

Regression analysis

We take this approach as a starting point in the estimation equation

The basic idea of this approach is to establish a trade-off between income and wellbeing. That is, for a given wellbeing effect, how much of an increase/decrease in income must an individual experience in order to create a corresponding change in wellbeing. Or to put it another way, how much of an increase in income would it take for an individual to be indifferent between an increase in income and an increase in the social parameter.

Here we draw on core concepts from the economic toolbox as we attempt to calculate the marginal rate of substit ution (MRS) between the non-traded market good (the social parameter) and income, while holding subjective well-being constant. The Marginal Rate of Substitution can be expressed in a simple form as:

|MRS| = _ꞵSP / ꞵI_,

which represents the ratio of the estimated effects - i.e. the coefficients from a robust regression analysis. The overriding assumption here is that we can establish a causal link between the social parameter and subjective well-being, and between income and subjective well-being (measured as life satisfaction). It is therefore essential that we have good and reliable estimates, which ties in with the discussion raised earlier in the chapter.

Electoral experiment

A third approach is choice action experiments, which can potentially alleviate some of the methodological barriers associated with the regression-based approach. The basic idea of this approach is that respondents from our desired population answer a questionnaire where they are presented with a series of choices to decide which of two hypothetical people's life situations, Person A and Person B, they perceive to be associated with the highest quality of life. Respondents are given the income of the two people and a number of social parameters that we want to calculate the social value of. This could be, for example, whether they feel lonely or how safe the neighborhood they live in is. In addition to the social parameters, the two people are exactly the same in terms of age and gender, for example. 

Each respondent is presented with a series of choices between the life situations of the two hypothetical people and asked to rate the life satisfaction of the two people on a scale from 0 to 10. The social parameter values of the two hypothetical people are randomly generated for each choice. This means that the characteristics of Person A and Person B are completely independent of all other factors. This is essential and what allows us to keep all other factors that can influence the assessment of life satisfaction constant. Since all other factors do not vary, we can estimate causal estimates of the perceived importance of each of the characteristics for life satisfaction.

In the questionnaire, respondents are also asked to provide their age and gender, which means that we can later calculate the social values heterogeneously, i.e. across relevant subgroups. This allows us, for example, to estimate the value of social parameters for men and women separately.

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