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Policy Challenges of the Heterogeneity of the Value of Statistical Life

Policy Challenges of the Heterogeneity of the Value of Statistical Life. W. Kip Viscusi University Distinguished Professor Vanderbilt University kip.viscusi@vanderbilt.edu Presentation at CREATE-DHS Conference September 24, 2010. The Average Value of Statistical Life.

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Policy Challenges of the Heterogeneity of the Value of Statistical Life

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  1. Policy Challenges of the Heterogeneity of the Value of Statistical Life W. Kip Viscusi University Distinguished Professor Vanderbilt University kip.viscusi@vanderbilt.edu Presentation at CREATE-DHS Conference September 24, 2010

  2. The Average Value of Statistical Life • Median U.S. value is $7 million ($2000) or $8.7 million ($2009) based on meta analysis in Viscusi and Aldy (2003) • Require $870 to face risk of 1/10,000 • Foreign countries have VSL estimates in expected range, e.g., India is lower .

  3. Heterogeneity Based on Risk Level Workers who choose higher risk levels are on flatter part of market offer curve.

  4. Heterogeneity Based on Risk Level, cont’d Early studies found workers with fatality risk of 1/10,000 (Viscusi 1978, 1979) had VSL 5 times greater than study of workers facing risk of 1/1,000 (Thaler and Rosen 1975). Differences arise from legitimate heterogeneity in VSL tradeoffs not failure of economists to find “the value of life number.” .

  5. Heterogeneity Based on Age VSL will vary with age because length of remaining life varies Imperfect capital markets Life-cycle effects .

  6. Age and the Labor Market • Series of studies over two decades • Most recent use age-specific risk data • Result is inverted-U shape pattern • Flatter if control for consumption over the life cycle or cohort effects • VSL tracks lifetime income and consumption (Kniesner, Viscusi, and Ziliak 2006) .

  7. Cohort-Adjusted and Cross-Section Value of Statistical Life, 1993-2000

  8. What Do We Know About Age-VSL? • VSL does not peak at birth • VSL does not plummet as we age • VSL for workers around age 60 is higher than for workers age 20 .

  9. The “Senior Discount” Controversy • EPA used a senior discount of 37% in analysis of Clear Skies initiative in 2002. • Political firestorm Seniors on sale 37% off • EPA backed off approach. Proposed Senate legislation banning all demographic adjustments. .

  10. Value per Year of Life (VSLY) • Not a constant, as assumed and estimated in Moore and Viscusi (1988), which developed and estimated VSLY formula and rate of discount • Advent of better data makes possible more refined risk measures. Viscusi-Aldy (2007) and Aldy-Viscusi (2008) use industry by age fatality rate. • VSLY not constant and not steadily declining with age even though health may decline • VSLY rises fairly steadily .

  11. Value of a Statistical Life-Year Based on Cohort-Adjusted and Cross-Section Value of Statistical Life, 1993-2000

  12. Segmented Labor Markets Workers may face different labor market offer curves Settle into separate labor market equilibria (Viscusi and Hersch 2001) Test: If workers face greater risk levels but receive less total wage compensation for risk, then cannot be on same market offer curve. .

  13. The Viscusi-Hersch Hedonic Labor Market Model

  14. Examples of Separate Labor Market Offer Curves Smokers and Nonsmokers (Viscusi and Hersch 2001) Black-white VSL differences (Viscusi 2003) Mexican immigrants versus other immigrants or native Americans (Hersch and Viscusi 2010) .

  15. VSL and Immigrant Status *Fatality rate by industry-immigrant status-age. Risk is annual fatality rate per 100,000 workers.

  16. Income Elasticity Estimates Meta analysis by Viscusi and Aldy (2003) – elasticity in 0.51 to 0.61 range for 10 different specifications. Within sample quantile estimates by Kniesner, Viscusi, and Ziliak (2010) imply mean elasticity across quantiles of 1.44. Meta analyses may suppress some income elasticity, but clearly elasticity is positive. .

  17. Should Income Levels Matter? • VSL increases with income • Provide policies poor don’t value? • Airline safety – should we regulate it more stringently than highway safety? • Planes versus guardrails • DOT adopted Viscusi-Aldy (2003) elasticity estimate of 0.55. • Rationale is stronger if beneficiaries of safety regulation pay for higher costs of safety. .

  18. Income at Point of Time or Over Time DOT’s proposed adjustment is very bold policy initiative to account for within population differences. Income changes over time for future generations receive greater support. Efficient, but redistributes income from poorer current generation to richer future generation. .

  19. Posner–Sunstein Proposal • Overview • Compensation to include hedonic damages plus conventional economics damages. • Results will be wildly excessive insurance and excessive deterrence. • Hedonic Loss Pitfalls • Note any use provides excessive insurance and imposes harmful excessive cost. • Compulsory insurance claimants don’t value. • Authors present no formal theory of deterrence of insurance. .

  20. Posner–Sunstein Implementation • How Posner–Sunstein Calculate VSL • Method 1 – Use the government number. • Method 2 – Determine victim’s VSL – R/q, where R is compensation for risk q. • Method 3 – Ask the jury to set a “value of life’s pleasures lost by the victim.” How? • Method 4 – How much would the victim pay to avoid the risk? Hindsight? • Proposal. Judges use government values. • Proposal would “have a significant impact on tort awards, especially for the elderly in non-hedonic loss states.” .

  21. Compensatory Damages Bonus • Additional Damages Beyond VSL • Amount of money needed to compensate for economic loss. • Double counting plus excessive deterrence and insurance. .

  22. Terrorism Risks How do people perceive terrorism risks? • How do these risk perceptions compare with beliefs for other risks? • What factors influence risk beliefs, and are those effects reasonable? • Are people subject to irrational beliefs? .

  23. Terrorism Risk Valuations How do people value terrorism risks? • Do people favor continued aid to terrorism victims? • Are people willing to trade off civil liberties to reduce terrorism risks? • How does reducing terrorism deaths compare to traffic safety and natural disasters? .

  24. Subjective Level of Risk by Type of Fatality

  25. Ordered Probit Regressions on Subjective Terrorism Fatality Risk

  26. Ordered Probit Regressions for Government Relief for Terrorism Victims

  27. Percentage Change in Terrorist Risk Estimates after September 11

  28. Determinants of the Probability of Favoring Targeting of Passengers for Airport Screening

  29. Examples of Risk Tradeoff Questions Sample Terrorism Question: Suppose you can vote for one of two different policies that cost the same amount but reduce different kinds of risks. Traffic safety policies reduce isolated deaths. The terrorism policy prevents deaths from a single major attack. Which of the two policies would you prefer?

  30. Relative Risk Valuations after Accounting for Risk Beliefs

  31. Conclusion Evidence on heterogeneity of VSL has increased. Political sensitivity of recognizing heterogeneity is often great. Terrorism risks are a prominent candidate for possible differential treatment because of the bundled nature of what is lost. Off the shelf benefits transfer approaches are inappropriate. .

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