Question

Diabetic Toby Warbet quit her secretarial job last year because of physical problems, including blurred vision and a general loss of sensation. Such was her desperation that when she heard about an unproven treatment that might help her, she decided to borrow $20,000 from relatives to pay for it . . . “Even if the chances are one in a million, I was hoping I would be the one,” says the Livingston, NJ resident.

How might you measure the value of Toby Warbet’s life using the human capital approach and attain a figure close to the willingness-to-pay approach?

Answer 1

The value of Toby Warbet’s life can be found out by using the human capital approach by assuming that the treatment cures her ailment. And post getting cured, she would be able to continue in her job and earn the stated salaries with increment as per market rates.

If we discount the earnings over life time at a market rate of interest, we get the present value of the potential earnings that Toby would have earned had she not got the disease or would get cured and continue to earn normally.

Using this approach suppose Toby earns $ E with rate of growth in her earnings by g% and the market interest rate is r% and she continues to earn till time T, then the present value of her earnings are:

PV = ? E*(1+g)/(1+r)

With adjustment in earnings (E), the growth rate g and the discount rate r, the human capital value would measure the potential opportunity cost of the treatment. That is if the treatment is not availed, this is the amount of earnings foregone. By suitable adjustment in parameters, this can be made equal to the willing ness to pay value by changing the earnings (E), growth rate g and the discount rate r.