the heterogeneity of the value of statistical life w. kip viscusi university distinguished professor...
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The Heterogeneity of the Value of Statistical Life
W. Kip ViscusiW. Kip Viscusi
University Distinguished ProfessorUniversity Distinguished Professor
Vanderbilt UniversityVanderbilt University
American Society of Health EconomistsAmerican Society of Health Economists
June 20, 2010June 20, 2010
Value of Statistical Life (VSL)
Academic LiteratureAcademic Literature DefinitionDefinition Labor market studiesLabor market studies Variation with risk levelsVariation with risk levels Segmented labor marketsSegmented labor markets AgeAge IncomeIncome ..
VSL Outline Cont’d
Policy ArenaPolicy Arena Adoption of the VSL methodologyAdoption of the VSL methodology Age controversyAge controversy Income controversiesIncome controversies
The Future of VSLThe Future of VSL..
Calculating the Value of Statistical Life
Suppose 1/10,000 risk to 10,000 people so 1 expected death
Assume each would pay $800 to eliminate the risk
VSL = 10,000 people × $800/person = $8,000,000
.
Dominant Approach: Wage-Risk Tradeoffs
Adam Smith’s theory of compensating wage Adam Smith’s theory of compensating wage differentialsdifferentials
Controlling for other aspects of the job, how Controlling for other aspects of the job, how much pay for extra risk?much pay for extra risk?
Hedonic wage model as workers pick optimal Hedonic wage model as workers pick optimal (risk, wage) combination from market offer (risk, wage) combination from market offer curve.curve. . .
The Average Value of Statistical Life
Median U.S. value is $7 million ($2000) or Median U.S. value is $7 million ($2000) or $8.7 million ($2009) based on meta analysis $8.7 million ($2009) based on meta analysis in Viscusi and Aldy (2003)in Viscusi and Aldy (2003)
Require $870 to face risk of 1/10,000Require $870 to face risk of 1/10,000 Foreign countries have VSL estimates in Foreign countries have VSL estimates in
expected range, e.g., India is lowerexpected range, e.g., India is lower..
Heterogeneity Based on Risk Level Workers who choose higher risk levels are Workers who choose higher risk levels are
on flatter part of market offer curve. on flatter part of market offer curve.
Heterogeneity Based on Risk Level, cont’d
Early studies found workers with fatality Early studies found workers with fatality risk of 1/10,000 (Viscusi 1978, 1979) had risk of 1/10,000 (Viscusi 1978, 1979) had VSL 5 times greater than study of workers VSL 5 times greater than study of workers facing risk of 1/1,000 facing risk of 1/1,000
(Thaler and Rosen 1975).(Thaler and Rosen 1975). Differences arise from legitimate Differences arise from legitimate
heterogeneity in VSL tradeoffs not failure heterogeneity in VSL tradeoffs not failure of economists to find “the value of life of economists to find “the value of life number.” number.” ..
Segmented Labor Markets
Workers may face different labor market Workers may face different labor market offer curvesoffer curves
Settle into separate labor market equilibria Settle into separate labor market equilibria (Viscusi and Hersch 2001)(Viscusi and Hersch 2001)
Test: If workers face greater risk levels but Test: If workers face greater risk levels but receive less total wage compensation for receive less total wage compensation for risk, then cannot be on same market offer risk, then cannot be on same market offer curve.curve. ..
Workers facing different offer curves settle into separate equilibria.
Examples of Separate Labor Market Offer Curves
Smokers and Nonsmokers Smokers and Nonsmokers
(Viscusi and Hersch 2001)(Viscusi and Hersch 2001) Black-white VSL differences Black-white VSL differences
(Viscusi 2003)(Viscusi 2003) Mexican immigrants versus other Mexican immigrants versus other
immigrants or native Americans immigrants or native Americans
(Hersch and Viscusi 2010)(Hersch and Viscusi 2010) ..
VSL and Immigrant Status
Fatality Risk* VSL
Estimates Bases on the CPS
Native U.S. 4.35 7.95
Mexican immigrants 5.97 Not significant
Estimates Based on the NIS
All immigrants 4.50 9.35
Mexican immigrants 5.70 Not significant
Mexican immigrants who speak English
5.70 3.44
*Fatality rate by industry-immigrant status-age. Risk is annual fatality rate per 100,000 workers.
Heterogeneity Based on Age
VSL will vary with age because length of VSL will vary with age because length of remaining life variesremaining life varies
Imperfect capital marketsImperfect capital markets Life-cycle effectsLife-cycle effects
..
Age and the Labor Market
Series of studies over two decadesSeries of studies over two decades Most recent use age-specific risk dataMost recent use age-specific risk data Result is inverted-U shape patternResult is inverted-U shape pattern Flatter if control for consumption over the Flatter if control for consumption over the
life cycle or cohort effects life cycle or cohort effects VSL tracks lifetime income and consumption VSL tracks lifetime income and consumption
(Kniesner, Viscusi, and Ziliak 2006)(Kniesner, Viscusi, and Ziliak 2006) ..
Cohort-Adjusted and Cross-Section Value of Statistical Life, 1993-2000
0
2
4
6
8
10
18 22 26 30 34 38 42 46 50 54 58 62
VSL (millions 2000$)
Cohort-Adjusted VSL Cross-Section VSL
What Do We Know About Age-VSL?
VSL does not peak at birthVSL does not peak at birth VSL does not plummet as we ageVSL does not plummet as we age VSL for workers around age 60 is VSL for workers around age 60 is higherhigher
than for workers age 20than for workers age 20..
Value per Year of Life (VSLY) Not a constant, as assumed and estimated in Not a constant, as assumed and estimated in
Moore and Viscusi (1988), which developed Moore and Viscusi (1988), which developed and estimated VSLY formula and rate of and estimated VSLY formula and rate of discount discount
Advent of better data makes possible more Advent of better data makes possible more refined risk measures. Viscusi-Aldy (2007) refined risk measures. Viscusi-Aldy (2007) and Aldy-Viscusi (2008) use industry by and Aldy-Viscusi (2008) use industry by age fatality rate.age fatality rate.
VSLY not constant and not steadily VSLY not constant and not steadily declining with age even though health may declining with age even though health may declinedecline
VSLY rises fairly steadily VSLY rises fairly steadily ..
Value of a Statistical Life-Year Based on Cohort-Adjusted and Cross-Section
Value of Statistical Life, 1993-2000
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
18 22 26 30 34 38 42 46 50 54 58 62
VSLY (2000$)
Cross-Section VSLYCohort-Adjusted VSLY
Applications of VSL and VSLY to Private Costs of Cigarettes
Viscusi and Hersch (2008) estimate VSL and VSLY Viscusi and Hersch (2008) estimate VSL and VSLY specific to smoking statusspecific to smoking status
Calculate the private mortality costs per pack of Calculate the private mortality costs per pack of cigarettescigarettes
At 3% interest rate, cost per pack is on order of $200 for At 3% interest rate, cost per pack is on order of $200 for men and $100 for womenmen and $100 for women
At smokers’ estimated labor market discount for years of At smokers’ estimated labor market discount for years of life of 14% (Scharff and Viscusi, 2010), cost per pack life of 14% (Scharff and Viscusi, 2010), cost per pack drops to $24 for men and $6 for womendrops to $24 for men and $6 for women
..
Income Effects
Proportional for present value of lost Proportional for present value of lost earningsearnings
Willingness to pay increases with incomeWillingness to pay increases with income Estimation strategies: meta analyses across Estimation strategies: meta analyses across
studies and quantile regression estimates studies and quantile regression estimates within samplewithin sample
. .
Income Elasticity Estimates
Meta analysis by Viscusi and Aldy (2003) – Meta analysis by Viscusi and Aldy (2003) – elasticity in 0.51 to 0.61 range for elasticity in 0.51 to 0.61 range for
10 different specifications.10 different specifications. Within sample quantile estimates by Within sample quantile estimates by
Kniesner, Viscusi, and Ziliak (2010) imply Kniesner, Viscusi, and Ziliak (2010) imply mean elasticity across quantiles of 1.44.mean elasticity across quantiles of 1.44.
Meta analyses may suppress some income Meta analyses may suppress some income elasticity, but clearly elasticity is positive.elasticity, but clearly elasticity is positive. . .
VSL in the Policy Arena
Adoption of the VSL approachAdoption of the VSL approach Age variationsAge variations Income variationsIncome variations Other controversiesOther controversies
..
Valuing Lives for Policy
1982 hazard communication debate1982 hazard communication debate Life is too sacred to value so OSHA Life is too sacred to value so OSHA
calculated “cost of death” as present value of calculated “cost of death” as present value of lost earningslost earnings
OMB: Benefits did not exceed costs so OMB: Benefits did not exceed costs so rejected regulatory proposalrejected regulatory proposal
OSHA appealed to V-P BushOSHA appealed to V-P Bush I analyzed merits of proposal using proper I analyzed merits of proposal using proper
value of statistical life (VSL) estimates – value of statistical life (VSL) estimates – 10 times the present value of lost earnings 10 times the present value of lost earnings . .
Using VSL Saves Lives
My 1982 estimates were just over My 1982 estimates were just over
$3 million$3 million Benefits now exceeded costs, and regulation Benefits now exceeded costs, and regulation
was issuedwas issued Historical context is that VSL was more Historical context is that VSL was more
supportive of risk regulation than making lives supportive of risk regulation than making lives “priceless”“priceless”
VSL now under attack for pricing livesVSL now under attack for pricing lives . .
The “Senior Discount” Controversy EPA used a senior discount of 37% in analysis of EPA used a senior discount of 37% in analysis of
Clear Skies initiative in 2002.Clear Skies initiative in 2002. Political firestormPolitical firestorm
Seniors on saleSeniors on sale
37% off37% off
EPA backed off approach. Proposed Senate EPA backed off approach. Proposed Senate legislation banning all demographic adjustments.legislation banning all demographic adjustments.
. .
International “Senior Discounts”
Canada used a VSL 25% lower for those Canada used a VSL 25% lower for those over 65 compared to those under 65.over 65 compared to those under 65.
In 2001, European Commission In 2001, European Commission recommended VSL that declines with age. recommended VSL that declines with age.
..
Does Fairness Provide Any Insight?
Is same value per statistical life equitable?Is same value per statistical life equitable?
versusversus Is same value per statistical life year Is same value per statistical life year
equitable?equitable? Return to first principles—willingness to Return to first principles—willingness to
pay pay ..
Should Income Levels Matter?
VSL increases with incomeVSL increases with income Provide policies poor don’t value?Provide policies poor don’t value? Airline safety – should we regulate it more Airline safety – should we regulate it more
stringently than highway safety? stringently than highway safety? Planes versus guardrailsPlanes versus guardrails
DOT adopted Viscusi-Aldy (2003) elasticity DOT adopted Viscusi-Aldy (2003) elasticity estimate of 0.55.estimate of 0.55.
Rationale is stronger if beneficiaries of safety Rationale is stronger if beneficiaries of safety regulation pay for higher costs of safety.regulation pay for higher costs of safety. ..
Income at Point of Time or Over Time
DOT’s proposed adjustment is very bold DOT’s proposed adjustment is very bold policy initiative to account for within policy initiative to account for within population differences. population differences.
Income changes over time for future Income changes over time for future generations receive greater support.generations receive greater support.
Efficient, but redistributes income from Efficient, but redistributes income from poorer current generation to richer future poorer current generation to richer future generation.generation. ..
Income at Point of Time or Over Time, cont’d
Reference dependence effect. Proposed Reference dependence effect. Proposed Senate legislation in 2008 to require income Senate legislation in 2008 to require income adjustment for VSL and require that only adjustment for VSL and require that only increases in VSL be permitted.increases in VSL be permitted. ..
The 2008 Devaluation of Life Controversy
Based on conflicting results of 2 meta Based on conflicting results of 2 meta analyses (Viscusi and Aldy vs. analyses (Viscusi and Aldy vs. Mrozek and Taylor), in 2008.Mrozek and Taylor), in 2008.EPA Air Office lowered the VSL from EPA Air Office lowered the VSL from $8 million to $7 million$8 million to $7 million
Economic puzzle since income levels have Economic puzzle since income levels have risen. Why did studies differ? risen. Why did studies differ?
Political firestorm – Bush conspiracy?Political firestorm – Bush conspiracy? . .
The 2008 Devaluation of Life Controversy, cont’d
Proposed Senate legislation in Fall 2008 Proposed Senate legislation in Fall 2008 requiring that agencies must only raise VSL requiring that agencies must only raise VSL over time. over time.
But EPA Air Office number still relatively But EPA Air Office number still relatively high. high.
..
Other Sources of Variation in Valuing Life
How people die mattersHow people die matters Victims of terrorism versus natural disasters Victims of terrorism versus natural disasters
differ by factor of 2 in society’s valuation of differ by factor of 2 in society’s valuation of reducing their risks (Viscusi 2009)reducing their risks (Viscusi 2009)
Irresponsible behavior by people who put Irresponsible behavior by people who put themselves at risk reduces their societal values, themselves at risk reduces their societal values, e.g., railway trespassers and suicides (Covey, e.g., railway trespassers and suicides (Covey, Robinson, Jones-Lee, and Loomes 2010). Robinson, Jones-Lee, and Loomes 2010).
..
Conclusion VSL has been an integral part of benefits VSL has been an integral part of benefits
assessment for a quarter centuryassessment for a quarter century Misunderstanding of the “economic” value of life Misunderstanding of the “economic” value of life
may stimulate much of the continued controversymay stimulate much of the continued controversy Opposition to VSL is often misguidedOpposition to VSL is often misguided Improved fatality rate data and survey data have Improved fatality rate data and survey data have
greatly expanded questions that researchers can greatly expanded questions that researchers can addressaddress ..
Conclusion, cont’d
Estimates of heterogeneity and sources of Estimates of heterogeneity and sources of heterogeneity are becoming more refinedheterogeneity are becoming more refined
More refined VSL estimates present new More refined VSL estimates present new policy challengespolicy challenges
Treating some risk reductions as “priceless” Treating some risk reductions as “priceless” may make them “worthless” may make them “worthless”
..
Selected References Aldy, Joseph E., and W. Kip Viscusi. 2007. “Age Differences in the Aldy, Joseph E., and W. Kip Viscusi. 2007. “Age Differences in the
Value of Statistical Life: Revealed Preference Evidence.” Value of Statistical Life: Revealed Preference Evidence.” Review of Review of Environmental Economics and PolicyEnvironmental Economics and Policy, 1(2): 241-260. , 1(2): 241-260.
Aldy, Joseph E., and W. Kip Viscusi. 2008. “Adjusting the Value of a Aldy, Joseph E., and W. Kip Viscusi. 2008. “Adjusting the Value of a Statistical Life for Age and Cohort Effects.” Statistical Life for Age and Cohort Effects.” Review of Economics and Review of Economics and StatisticsStatistics, 90(3): 573-581., 90(3): 573-581.
Hersch, Joni, and W. Kip Viscusi. 2010. “Immigrant Status and the Value Hersch, Joni, and W. Kip Viscusi. 2010. “Immigrant Status and the Value of Statistical Life.” of Statistical Life.” Journal of Human Resources.Journal of Human Resources.
Kniesner, Thomas J., W. Kip Viscusi, and James P. Ziliak. 2010. “Policy Kniesner, Thomas J., W. Kip Viscusi, and James P. Ziliak. 2010. “Policy Relevant Heterogeneity in the Value of Statistical Life: New Evidence Relevant Heterogeneity in the Value of Statistical Life: New Evidence from Panel Data Quantile Regressions.”from Panel Data Quantile Regressions.”Journal of Risk and UncertaintyJournal of Risk and Uncertainty, , 40(1): 15-31.40(1): 15-31.
Scharff, Robert L., and W. Kip Viscusi. 2010. “Heterogeneous Rates of Scharff, Robert L., and W. Kip Viscusi. 2010. “Heterogeneous Rates of Time Preference and the Decision to Smoke.” Time Preference and the Decision to Smoke.” Economic Inquiry.Economic Inquiry.
Viscusi, W. Kip. 1979. Viscusi, W. Kip. 1979. Employment Hazards: An Investigation of Market Employment Hazards: An Investigation of Market PerformancePerformance, Harvard Economic Studies No. 148. Cambridge: Harvard , Harvard Economic Studies No. 148. Cambridge: Harvard University Press.University Press.
Selected References, cont’d Viscusi, W. Kip. 2003. “Racial Differences in Labor Market Values of Viscusi, W. Kip. 2003. “Racial Differences in Labor Market Values of
a Statistical Life.” a Statistical Life.” Journal of Risk and UncertaintyJournal of Risk and Uncertainty, 27(3): 239-256. , 27(3): 239-256. Viscusi, W. Kip. 2009. “The Devaluation of Life.” Viscusi, W. Kip. 2009. “The Devaluation of Life.” Regulation Regulation
and Governanceand Governance, 3(2): 103-127. , 3(2): 103-127. Viscusi, W. Kip. 2009. “Valuing Risks of Death from Terrorism and Viscusi, W. Kip. 2009. “Valuing Risks of Death from Terrorism and
Natural Disasters.” Natural Disasters.” Journal of Risk and UncertaintyJournal of Risk and Uncertainty, 38(3): 191-213. , 38(3): 191-213. Viscusi, W. Kip, and Joseph E. Aldy. 2003. “The Value of a Statistical Viscusi, W. Kip, and Joseph E. Aldy. 2003. “The Value of a Statistical
Life: A Critical Review of Market Estimates throughout the World.” Life: A Critical Review of Market Estimates throughout the World.” Journal of Risk and UncertaintyJournal of Risk and Uncertainty, 27(1): 5-76., 27(1): 5-76.
Viscusi, W. Kip, and Joseph E. Aldy. 2007. “Labor Market Estimates Viscusi, W. Kip, and Joseph E. Aldy. 2007. “Labor Market Estimates of the Senior Discount for the Value of Statistical Life.” of the Senior Discount for the Value of Statistical Life.” Journal of Journal of Environmental Economics and ManagementEnvironmental Economics and Management, 53(3): 377-392., 53(3): 377-392.
Viscusi, W. Kip, and Joni Hersch. 2001. “Cigarette Smokers as Job Viscusi, W. Kip, and Joni Hersch. 2001. “Cigarette Smokers as Job Risk Takers.” Risk Takers.” Review of Economics and StatisticsReview of Economics and Statistics, 83(2): 269-280., 83(2): 269-280.
Viscusi, W. Kip, and Joni Hersch. 2008. “The Mortality Cost to Viscusi, W. Kip, and Joni Hersch. 2008. “The Mortality Cost to Smokers.” Smokers.” Journal of Health EconomicsJournal of Health Economics, 27(4): 943-958., 27(4): 943-958.