Academic journal article Journal of Economics and Finance

How to Value a Life

Academic journal article Journal of Economics and Finance

How to Value a Life

Article excerpt

Abstract The tradeoff between money and small risks of death is the value of statistical life (VSL), which has become the standard for assessing the benefits of risk and environmental regulations. Labor market estimates of the VSL average about $7 million. This valuation amount rises with age and then declines, closely tracking the pattern of consumption over the life cycle. The VSL for those at age 60 is higher than for people in their 20s. Application of this methodology to assess the mortality costs to smokers indicates a personal mortality cost on the order of $200 per pack for men and $100 for women using a 3% discount rate, but based on smokers' rates of time preference the costs are reduced by about an order of magnitude.

Keywords Value of Statistical Life * Risk Regulation * Cigarettes * Mortality Cost

JEL codes J17 * I12 * I18

1 Framing our thinking about the value of life

When non-economists hear that economists are placing a value on risks to human life, they typically assume that such economic measures involve some sort of morally offensive accounting exercise, such as equating the value of an individual life with the present value of his or her future earnings. Such measures do, of course, have prominence in personal injury litigation, as they serve as a principal reference point for the financial loss that a family has incurred after a wrongful death to a family member. However, the economic approach to valuing life, or more specifically, valuing risks to life, is quite different and more legitimate than an accounting procedure based on one's income.

To see how economists conceptualize value of life issues, it is useful to start with a thought experiment. In particular, how much would you be willing to pay to eliminate a one-time only risk of death of 1/10,000? To conceptualize this risk, it is helpful to imagine that you are attending a sporting event in a crowd of 10,000, where one of you will not survive. Suppose you have to pick from one of the following dollar categories as the most that you would be willing to pay to get out of this risk: infinite amount, above $ 1 ,000, $500-$ 1 ,000, $200-$499, $50-$199, and under $50. For concreteness, I will interpret an infinite amount as equal to your present and future resources, leaving enough left to subsist. Which amount would you select?

As with most people whom I have tested with this question, no attendees at the 2008 annual meeting of the Academy of Economics and Finance indicated that they were willing to pay an infinite amount to escape the risk. Their responses indicate that the idea of placing a finite value of risks to Ufe is in fact quite reasonable even though many people's initial instincts might have been that life is "priceless." Most responses are in the $200-$ 1,000 range, which is quite reasonable. Responses under $50 generally indicate that the person did not take the risk of death seriously or else is well suited for an extremely dangerous job.

Suppose that each person is willing to pay $500 to eliminate the risk of one death to the group of 10,000 exposed to the risk. Then this pattern of responses means that to avert the one expected death it would be possible to raise $500 per person ? 10,000 people, or $5 million. The value of a statistical life, or VSL, is consequently $5 million. Alternatively, one can calculate the VSL by dividing the willingness to pay amount by the probability reduction, or $500/(l/10,0Q0)=$5 million. What the VSL is capturing is people's rate of tradeoff between money and very small risks of death. It is not the amount that a person would be willing to pay to avoid certain death, nor is it the amount that a person would require to be compensated for facing certain death. Matters involving the certainty of life and death will have a quite different value than the value of reducing these very small risks.

While one could construct VSL levels based on stated preferences for risk reduction, most of the economics literature has focused on tradeoff rates implied by actual decisions. …

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