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A Model Using Household-Income and Household-Consumption Data to Estimate the Cost

and the Effectiveness of Subsidies

Lorenzo Sabatelli GLOB MOD

Dean T. JamisonUniversity of Washington

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Consumer Choice, Health Risk, and Policy

Global Health-Risk Factors

Childhood underweight

Household air pollution from solid fuel

High blood pressure

Suboptimal breastfeeding

Tobacco smoking and second hand smoking

Ambient particulate matter pollution

Diet low in fruits

Iron deficiency

High fasting plasma glucose

High body-mass index

Diet high in sodium

Alcohol use

Unimproved sanitation

High total cholesterol

Diet low in nuts and seeds

Vitamin A deficiency

Diet low in vegetables

Diet low in grains

Zinc deficiency

Unimproved water source

People do not choose to become ill, choose to be happy

Individuals and Households make choices on the

purchase of goods and services

They try to optimize the use of available resources to

maximize the satisfaction of their perceived needs

(Maximization of Utility)

Some choices may be optimal, but not for health

Governments can use financial instruments, such as

subsidies, to influence consumer choices

Subsidies decrease the out-of-pocket price of certain

goods to the consumer, increasing demand

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Data on

Household

Budget

Allocation

Data on Household

Income and Consumption

Data on

Utility and

Income

Cost and Effectiveness of Subsidizing the Installation of Household-Based Sanitations in Rural India

Case-Study

MODEL

Cost and Effectiveness of Subsidizing the Purchase of Health-Relevant Goods

Overview

Do not reproduce without the express written consent of the authors

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Parameter Intuitive Definition

Income Elasticity of Demand

The percent change in the demand for a class

of goods (e.g. food, clothes, housing) due to a

1% increase in income, when prices remain

constant.

Uncompensated Own-Price Elasticity of Demand

The percent change in the demand for a class

of goods (e.g. food, clothes, housing) due to a

1% increase in the average price, when income

and the price of other goods remain constant.

Budget Share The proportion of a consumer budget used to

purchase goods of the class of interest.

Quantities of Interest

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Elasticity of the Marginal Utility of Income

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The Model Recipe

BUDGET

SHARE

OF GOOD

X

INCOME ELASTICITY OF

DEMAND OF GOOD X

ELASTICITY

OF THE

MARGINAL

UTILITY OF

INCOME

Price Elasticity of Household-Based Sanitations in Rural India

UNCOMPENSATED OWNPRICE ELASTICITY OF DEMAND

OF GOOD X

Do not reproduce without the express written consent of the authors

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Utility increases with income, with decreasing margins (convexity)

Consumers allocate their own budget to the purchase of goods and services in a way that

maximizes utility

Demand adjusts to changes in prices and in income in a very short (negligible) time

Preference Independence: the utility associated with the consumptions of one class of goods

does not depend on the consumption of goods of a different class (no interaction)

These assumptions are the basis of the so called Florida Preference Independence Model

Model Assumptions

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Uncompensated Own-Price Elasticity vs. Income Elasticity

ModelAssumptions

Demand Equation

Relationship betweenprice-elasticity and income-elasticity

To protect the confidentiality of unpublished results this slide is different from the original used in the GHME 2013 conference

Price Elasticity = function (Income Elasticity; Budget Share; Elasticity of the Marginal Utility)

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Background

60% - 70% of households without latrines

Absence of improved sanitations is a major

public-health risk factor

Data Sources

District Level Household and Facility Survey

(DLHS) provides health care and utilization

indicators at the district level

Asian Development Bank statistics and

policy documents

APPLICATIONSubsidizing the Installation of Sanitations in Rural India

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What is Income, by the way?

Permanent-income was estimated on a log-

scale with a random-effects probit model

using household asset ownership as a

(probabilistic) proxy for household income

Calculation of Income, Income Elasticity and Other Parameters

Calculating the income elasticity with a Mixed-Effect First Difference Regression using

DLHS-2 and DLHS-3 data

Parameter Value

Annual cost of one basic improved-sanitation facility

5.5-11 US$

Current sanitation coverage ~32%

Total number of households 140 millions

Additional parameters

To protect the confidentiality of unpublished results this slide is slightly different from the original used in the GHME 2013 conference

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Results

Additional Number of Households with Sanitations

Annual Cost to the Policy Maker

Please note: These results are preliminary. Do not reproduce without the express written consent of the authors

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Within the framework of the Florida Preference Independence Model, a relationship exists

between the uncompensated own price elasticity of demand and the income elasticity of demand

for a given class of market goods.

When used to study the impact of subsidizing sanitations in rural India, the model provides

probabilistic estimates of the achievable increase in coverage and of the potential cost to the

government, as a function of the subsidized fraction of the price

The proposed approach may provide a fast and inexpensive method for broad brush

assessments that could help design policies and set public-health priorities.

Future developments are likely to involve: technical improvements of the model here presented;

expansion to other financial instruments; and developing user-friendly software tools for

simulating the impact of financial instruments in health policy.

Conclusions and Future Developments