The Use, or Abuse, of Hedonic Value-of-Life Estimates in Personal Injury and Death Cases
Raymond, Richard, Journal of Legal Economics
Over the past decade, the use of hedonic value-of-life (VOL) estimates has been extensively debated in the professionalpractitioner literature.' The pros and cons of many of the considerations surrounding the use of these estimates have been covered repeatedly. However, some issues have received little attention and recent research results have yet to be incorporated fully into the debate. In addition, much of the debate has been technical in nature and, therefore, inaccessible to the lay public. In particular, legislators, judges and juries often lack the technical background in economics and statistics necessary to assess the relative validity of the conflicting arguments.
This paper attempts to translate some of the technical objections to the use of hedonic VOL estimates into terms accessible to the layman. Illustrative examples have been constructed in a manner designed to be generally consistent with the technical aspects of the issues being discussed. Recent research and neglected issues are incorporated into the presentation at appropriate points. The citations and arguments presented do not represent an exhaustive list of the published objections to hedonic estimates. No attempt is made to cover completely the opposing side of the debate. Nevertheless, both the volume and the nature of the major objections seem to point clearly toward the inappropriateness of the use of VOL estimates for forensic purposes at the present time.
Basic Estimation Procedure
Viscusi provides the following brief summary of the manner in which hedonic VOL measures are estimated in labor market settings: "Consider... an annual risk of death of 1/10,000. Suppose that this worker is willing to face this risk for an additional wage premium of $500 per year .... [This] ... implies a total compensation level per statistical death of $5 million (italics added). Viewed somewhat differently, if 10,000 workers each faced an annual risk of death of 1/10,000 and were compensated at $500 each for facing the risk, then the total risk compensation for the one expected death would be 5 million dollars."' (Viscusi 1990a, 4-5) In this case, the $5 million figure represents the hedonic estimate of the VOL. Some additional elaboration may help to clarify the logic underlying the use of this estimation procedure in litigation.
Consider a twenty-year-old high school graduate earning $12,000 a year on ajob entailing no risk of death. If other risks confronting this individual are negligible, then he is virtually certain to survive the coming year.3 Suppose that he is now offered a new job identical to the current job except that the new job entails an annual risk of death of 1 in 1,000, i.e., if 1,000 people work at this job for a year, a work related accident will claim the life of one of these workers. The new job pays $3,000 more than the current job. If he accepts the new job, and if any wage premium less than $3,000 would have caused him to reject it, then conventional hedonic VOL estimation procedures would place the individual's valuation of his life at $3,000,000 (1,000 times $3,000).4
The arithmetic is straightforward. The individual is willing to accept a 1 in 1,000 chance of death for $3,000. Thus, to be consistent with the implied theory, he should be willing to accept certain death for 1,000 times this amount, or, $3,000,000; therefore, $3,000,000 is the value that he places on his life. The arithmetic may be straightforward, but the logic is badly flawed.
It is certainly not unreasonable to assume that a healthy 20-yearold high school graduate earning $12,000 per year would be willing to accept an increased chance of death of one in 1,000 for an additional $3,000 per year. Many individuals may regard an event with one chance in 1,000 of occurrence as one very unlikely to materialize. In addition, the $3,000 raise increases annual income by 25%, which is clearly significant.
Now consider the same person with sequential offers of new jobs, each ofwhich involves an additional one chance in 1,000 of death and an additional $3,000 raise, i. …