U3 - 1993 (Viscusi) The Value of Risks To Life and Health

American Economic Association
The Value of Risks to Life and Health

Author(s): W. Kip Viscusi
Source: Journal of Economic Literature, Vol. 31, No. 4 (Dec., 1993), pp. 1912-1946
Published by: American Economic Association
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Journal of Economic Literature
Vol. XXXI (December 1993), pp. 1912-1946
The Value of Risks

to Life and Health
By W. KiP Viscusi
Duke University
SusanJakubiakand three anonymousreferees provided detailed and

helpful comments. Many of the themes of this paper are developed
morefully in Viscusi (1992a).
1. Introduction yond our control have merited compara-

tively modest risk reduction efforts.
H EALTH AND SAFETY RISKS comprise Scientists estimate that we face an an-
one aspect of our lives that we nual fatality risk from asteroid impact-
would all like to eliminate. Even if we the "doomsday rock"-of 1/6,000 (New
set out to provide a risk-free existence, York Times, June 18, 1991, p. B5). Yet,
however, our efforts would be con- few would argue that we should abandon
strained by our economic resources. If efforts to reduce smaller risks, such as
the entire American GNP were devoted those posed by jobs and home accidents,
to preventing fatal accidents, we would and reallocate these funds to fending off
be able to spend an average of only $55 asteroids.' The key issue is the risk re-
million per fatality. There are also other duction that is achievable for any given
demands on these resources, ranging expenditure and the value society places
from food to recreation, which will re- on this risk reduction.
duce the funds available for risk reduc- The government faces a variety of op-
tion. portunities to reduce risk.2 Airplane
One possible approach is to set the risk cabin fire protection costs $200,000 per
reduction priorities based on the magni- life saved; automobile side door protec-
tude of the hazard. Table 1 lists a series tion standards save lives at $1.3 million
of risks involving market processes and each; Occupational Safety and Health
individual decisions that have been the Administration (OSHA) asbestos regula-
focus of economic analyses to be consid-
ered below. The vigilance that individu- 1 Some scientists have begun speculating on the
als and society should devote to reducing feasibilityof such riskreductions. For example, some
these risks is not, however, governed have suggested the use of nuclear weapons to alter
the path of an asteroid. Thus far, it appearsthat less
solely by their size. Risks thought to be flamboyantpolicies, such as improved guardrailson
amenable to technological improve- highways, would be more cost-effective.
ments, such as motor vehicle safety, have For a review of the federal guidelines on the
valuationof health risks, see the U. S. Officeof Man-
attracted the greatest attention. Risks be- agement and Budget (1988, 1990).
1912

Viscusi: The Value of Risks to Life and Health 1913
TABLE 1
off involving mortality risks and wages.
These labor market studies have ad-
Annual Fatality dressed the implicit values of life of
Source of Risk Risk workers in many countries, including the
United States, the United Kingdom,
Cigarette smoking
(per smoker) 1/150
Australia, Canada, and Japan. Straight-
Cancer 1/300 forward extensions of these models have
Motor Vehicle Accident 1/5,000 included a measure of nonfatal risks faced
Asteroid (doomsday rock) 1/6,000 by the worker, enabling analysts to im-
Work Accident (per worker) 1/10,000 pute an implicit value per statistical in-
Home Accident 1/11,000
Poisoning 1/37,000
jury in the workplace. Economists have
Fire 1/50,000 also analyzed the price-risk tradeoff for
Aviation Accident a variety of consumer products. In situa-
(passenger deaths/ tions in which no market data are avail-
total population) 1/250,000 able, such as some environmental risks,
Source: National Safety Council (1990); and further cal-
one can use surveys to derive a market
culations by Viscusi (1992a, 1992b): the smoking risk value if a market for the good existed.
estimates are averaged over the entire smoking popula- This paper explores these different ap-
tion. The average smoker consumes 1.5 packs per day. proaches to establishing appropriate eco-
nomic values for risks to life and health.
tions save lives at $89.3 million each; En- 2. Estimating the Value of Life Using
vironmental Protection Agency (EPA) as- Labor Market Data
bestos regulations save lives at $104.2
million each; and a proposed OSHA The dominant approach to obtaining
formaldehyde standard cost $72 billion estimates of the risk-dollar tradeoff uses
per life saved (John Morrall 1986).3 labor market data on worker wages for
Which of these different policies should risky jobs to infer attitudes toward risk.
be pursued, and which provide benefits The theory underlying this analysis ex-
that are not commensurate with their tends back to Adam Smith (1776), who
costs? observed that risky or otherwise unpleas-
In a democratic society, the appropri- ant jobs will command a compensating
ate starting point for analyzing these wage differential.
tradeoffs is the value individuals bearing Basic Elements of the Hedonic Wage
the risk place on the improved safety.4 Methodology
Over the past two decades, there has
developed a substantial literature on the The main empirical approach to assess-
value of these risk-money tradeoffs. The ing risk tradeoffs in the labor market has
greatest emphasis has been on the trade- utilized a methodology known as "he-
donic" (i.e., quality-adjusted) wage
equation.5 Controlling for other aspects
3These estimates reported by Morrall(1986) are
for new government regulations. For example, the
1986 OSHA asbestos standardthat cost $89.3 million 5A forerunnerof this line of work is the research
per life was more stringent than the 1972 OSHA on hedonic price indexes by Zvi Griliches (1971).
standard,which cost $7.4 million per life. Sherwin Rosen (1986) provides a survey of this ap-
4This principle is the same as in other benefit proach focusing on nonpecuniaryjob attributes in
valuation contexts. The primary matter of interest general, where health and safety risks represent a
is society's willingness to pay for the benefits gener- special case. See also Richard Thaler and Rosen
ated by the policy. ThomasSchelling (1968)first pre- (1976), Robert Smith (1979), and Viscusi (1979).
sented the willingness-to-payapproach in the life- Schelling (1968)first outlined the proper use of value
saving context. of life estimates.

1914 Journal of Economic Literature, Vol. XXXI (December 1993)
EU2
Wage only critical assumptions required for
~~~~~EU,
x
workers to demand compensating differ-
entials for risk are that one would rather
Wl(p2)- - - - _- -- __ - -G be healthy than not [U(w) > V(w)] and
w2(p2) - - -- the marginal utility of income is positive
F [U'(w), V'(w) > 0]. It is not necessary
w1(p1) - - - - EU2 to assume that individuals are risk-averse
EU, [U", V" < 0] in their attitude toward fi-
xI
nancial gambles.7
I G Workers will select the available wage-
/F l | Risk risk combination from the schedule WW
Pi P2 that yields the maximum expected util-
Figure 1. MarketProcess for Determining ity. For worker 1 in Figure 1 the optimal
Compensating Differentials job risk is at the point where the worker's
constant expected utility locus EU1 is tan-
of the job, what is the wage premium gent to FF, and for worker 2 it is where
workers receive for risk? These premi- EU2 is tangent to GG.
ums are the result of the interaction of The slope of the EU1 and EU2 curves
labor demand by firms and labor supply can be readily verified. Wage-risk combi-
decisions by workers. nations that maintain a worker's constant
Providing greater workplace safety is expected utility level consist of the points
costly to the firm. To maintain the same that satisfy
level of profits along some isoprofit
Z = (1 - p)U(w) + pV(w).
curve, the firm must pay a lower wage
rate to offset the cost of providing a safer The wage-risk tradeoff along this curve
work environment. The firm's wage offer is given by
curve consequently will be an increasing >
dw _ _ U(w)-V(w)
function of the risk. The offer curves for
two different firms appear in Figure 1 dp Zw (1 - p)U'(W)+ pV'(w)
as FF and GG. For any given risk level, or the required wage rate increases with
workers will prefer the market offer the risk level.
curve with the highest wage level. The points (p1,w1) and (p2,W2) in Fig-
The characteristics of the supply side ure 1 represent the points of tangency
of the market are defined by several mild of the two constant expected utility loci
restrictions on preferences. Consider a with the market wage opportunities.
formulation using a von Neumann-Mor- These are the points that are observable
genstern expected utility model with using labor market data. In effect, econo-
state-dependent utilities. Suppose that mists only observe particular wage-risk
U(w) denotes the utility of being healthy choices of different workers at points of
and V(w) denotes the utility of being in- tangency with the market opportunities
jured. Post-injury workers' compensation curve.
benefits are usually a function of w, The econometric task is to estimate the
where the exact relationship is subsumed locus of these wage-risk tradeoffs for the
into the functional form for V(w).6 The
7Risk neutrality (U", V' = 0) always leads to the

6If there is no dependence of benefits on w, results below. If individualsare risk lovers, the sec-
V'(w) = 0. So long as U'(w) > 0, the results below ond-order conditions may not be met. See Viscusi
will hold. (1979).

entire market. In effect, the hedonic local tradeoff rate would characterize
wage studies fit a curve XX through every worker's wage-risk tradeoff at that
points such as these and estimate the particular risk level. Similarly, consider
market locus of wage-risk tradeoffs. the case of homogeneous firms, where
The observed (pi,wi) reflect the influ- all firms have offer curves FF. If there
ence of both supply and demand on the are heterogeneous workers, the market
market equilibrium for the entire set of tradeoffcurve XX would approximate the
workers.8 The estimated rate of tradeoff firm's offer curve, and its slope would
aw/ap equals the slope of constant ex- approximate the marginal cost of altering
pected utility loci that are tangent to XX, job risks at that risk level.
thus providing a local measure of the With heterogeneous workers and het-
wage-risk tradeoff for marginal changes erogeneous firms, as in Figure 1, XX
in risk. For any given worker located does not provide estimates of either the
along XX, the estimated slope simulta- offer curves or constant expected utility
neously reflects the marginal willingness loci. Rather, XX reflects only a set of tan-
to accept risk and the marginal willing- gencies between different firms' offer
ness to pay for greater safety. The points curves and different workers' constant ex-
on XX also represent the points of tan- pected utility loci. The value of awilapi
gency of firms' offer curves with workers' at any given point (pi,wi) is the local
constant expected utility loci. The slope tradeoff that is pertinent to the particular
for the firm reflects both the marginal worker and firm located at that risk level.
cost of greater safety and the marginal The estimated tradeoff rate at different
cost reductions from an incremental in- levels of risk reflects other job-worker
crease in risk. The slope at any point matches.
awilapi consequently represents the mar- The estimated local tradeoffs may be
ginal supply price as well as the marginal a misleading index of the wage differen-
demand price of risk for both the worker tials required to maintain a worker's con-
and firm located at that point. Economet- stant expected utility in the presence of
ric models that estimate a linear XX as- a major change in risk because workers'
sume that the observed tradeoff rates are risk preferences may differ. Worker 2 is
the same at all levels of risk. willing to accept risk P2 for W2(p2). How-
The shape of the estimated locus of ever, worker 1 will require a higher
tradeoffsdepends on the mix of firms and amount of wage compensation WI(p2)
workers. The situation illustrated in Fig- along EU1 to face the risk level P2 than
ure 1 consists of heterogeneous workers worker 2 requires on EU2. If the esti-
and firms. If all workers were homoge- mated wage-risk tradeoff curve XX for
neous and, for example, had a constant the market were linear, then the esti-
expected utility locus EU1, then the ob- mated rate of tradeoffwould be the same
served market combination (pi,wi) would for all workers whose indifference curves
consist of a series of points along EU1 are tangent to XX. However, even for a
that were tangent to different firms' offer linear locus of tangencies XX, for changes
curves. The resulting estimates of XX of more than a marginal amount from the
would then approximate EU1, and the current risk level, the worker's wage-risk
tradeoffwill not be the same because the
8Inframarginalworkers earn an economic rent. pertinent tradeoff value must be mea-
The wage-risktradeoffof the marginalworker is in- sured along a constant expected utility
strumental in establishing the wage rate the firm
must pay and consequently the value of the risk re- locus, not the estimated market tradeoff
duction. curve.

General Specification Issues proaches involving the use of structural

equation systems have also been used to
The basic approach in the literature
isolate the wage-risk tradeoff controlling
is to specify a wage equation which char-
for other aspects of the job and the
acterizes the line XX in Figure 1, or
worker.12
M
Efforts to estimate variants of equation
wi = oX + E + 'YoPi
4JmXiml (1) before the 1970s were largely unsuc-
In1= 1
cessful because of the absence of detailed
+ ylqi + Y2qiWCi + ui, (1) micro data sets on individual worker be-
where wi is worker i's wage rate (or its havior. Large individual data sets on
natural logarithm), cxis a constant term, worker behavior generally include a
the xim are different personal characteris- more extensive set of demographic and
tic and job characteristic variables for job characteristic variables than industry
worker i (m = 1 to M), pi is the fatality data. Moreover, the values of these vari-
risk of worker i's job, qi is the job's nonfa- ables are matched to a particular worker
tal risk, WCi reflects the workers' com- rather than being averaged across the en-
pensation benefits that are payable for tire industry. If there is also available
worker i's job injury, ui is a random error job risk data by individual (e.g., self-
term reflecting unmeasured factors that assessed risk data) or by occupation, one
influence the wage rate, and the remain- will have information on actual points
ing terms are coefficients to be es- (pi,wi) selected in individual job choices
timated.9 The ximvalues play a key role rather than an average of such points
in that different worker characteristics,
such as education, will affect the firm's 12
More recently, some economistshave estimated
offer curve, the market opportunity lo- structuralequationsystems. See, in particular,James
Brown(1983), ShulamitKahnand Kevin Lang(1988),
cus, and worker preferences. 10 Figure 1 Jeff Biddle and Gary Zarkin(1988), Viscusi and Mi-
pertains to a group of workers who have chael Moore (1989), Moore and Viscusi (1990b,
identical productivity, but different pref- 1990c), and Joni Hersch and Viscusi (1990). These
erences. Some researchers have inter- models, which will be discussed further below, con-
sist of two-equation systems for which researchers
acted various xim variables with the risk have augmented equation (1) with variables such as
variables to capture the role of different regional variables that ideally serve to identify the
markets for workers that differ in terms marketwage opportunitieslocus, and there is a sec-
ond equationdefined by the tangencyof workerpref-
of their market opportunities." Interac- erences with this marketopportunitieslocus.
tive terms, such as education and risk, In particular,one estimates the nonlinearequation
reflect the joint influence of possible obtained after equating awlap on both a constantex-
pected utility locus and the market wage frontier.
differences in worker preferences as well For this approachto be feasible, one must assume
as differences in firms' offer curves for a specific functionalform for the utility function. The
workers with different educational attain- use of regional economic variables to identify the
marketopportunitieslocus assumes that the regional
ment. Alternative econometric ap- differencesreflect differencesin economic conditions
and perhaps technologies as well (e.g., logging in
the Pacific Northwest, petroleum exploration in
Texasand Alaska,etc.) If, however, individualprefer-
9A fuller version of the model also could include ences also vary across regions, then awlap may also
annuity benefits in the event of a fatality. vary systematically across regions. At the current
10 See Thalerand Rosen (1976),especially pp. 283- stage of development, it is not clear whether the
286. strong estimation assumptions of structuralmodels
" Although these interactions are usually to cap- are satisfied to a sufficient degree to yield reliable
ture productivity-relatedinfluences, discrimination- estimates that will be robust across data sets. The
based effects may also be influentialas well. In any emphasis here will be on traditionalhedonic wage
event, these interactive effects will reflect the joint estimation because many of the econometric issues
influence of worker and firm variations. are common to the structuralmodels as well.

across heterogeneous workers in an effect at work that will make it difficult
industry.13 to disentangle the wage-risk tradeoff that
Estimation using industry-wide data is present. Use of individual level data
sets often encountered difficulty in dis- that includes measures of worker educa-
tinguishing the positive wage premium tion, experience, and other productivity-
for job risks. The reliance on aggregative related variables isolates the additional
industry data pools workers with hetero- compensation workers of a given prod-
geneous preferences and firms with per- uctivity will receive for jobs posing
haps quite different offer curves so that greater risk. It cannot be determined,
the estimated tradeoffs at any particular however, whether observed differences
risk level cannot be linked to any work- in risk tradeoffrates reflect heterogeneity
er's preferences or any firm's offer curve. in firms' offer curves for workers with
In contrast, micro data sets give informa- different characteristics.
tion pertinent to one (pi,wi) point in re-
sulting from the decisions of a single firm The Wage Variable
and worker.
It is instructive to consider each of the
One source of variation lost with aggre-
components of equation (1) in turn. The
gation is that due to differences in life-
dependent variable is the worker's
time wealth. A negative relation between
hourly wage rate. In practice, research-
wealth and risk arises for two reasons.
ers have often been forced to use other
First, differences in worker preferences
income measures, such as the worker's
will influence this relationship because
annual income or a constructed wage
job safety is a normal economic good.'4
value using information on weeks and av-
More affluent workers will select a lower
erage hours worked. What is particularly
risk level from any given wage offer
relevant to the worker is not the gross
schedule. The wage wi that a worker re-
wage but rather the aftertax wage from
quires to accept any given risk pi will
a particular job. For most labor market
increase with wealth, and the wage-risk
studies this distinction is not of great con-
tradeoff awlap will also increase with
sequence because the main effect of taxes
wealth. Employees also will have more
is not too dissimilar from scaling up the
incentive to protect their more highly
wage rate by a factor of proportionality
skilled employees because they have a
if workers' income levels and tax rates
greater investment in their training.
do not differ substantially. However, if
Overall, as John Stuart Mill observed,
the equation also includes a workers'
the best jobs in society will tend to be
compensation variable, as in the case of
the highest paid. However, this does not
equation (1), then the workers' compen-
imply that there are no compensating dif-
sation benefits and the wage rate should
ferentials for any particularposition, only
be expressed in comparable aftertax
that there is a broader societal wealth
terms so as to measure the wage effects
of workers' compensation correctly.
1 Note that a firm's offer curve FF in Figure 1
for one class of workersmay differthan its offercurve Job Risk Measures
for a differentgroup of workers.
14 See Thalerand Rosen (1976), MichaelJones-Lee
(1976),Viscusi(1979),and Viscusiand WilliamEvans For most purposes, the most important
(1990). Researchers have attempted to capture the of the explanatory variables is the fatality
role of wealth through interactive risk x wealth vari- risk variable p that is the basis for esti-
ables, where wealth has been measured directly and
capturedthroughvariousproxiesfor lifetime wealth, mating the worker's fatality risk-money
such as education. tradeoff. The ideal risk measure would

reflect subjective assessment of the fatal- different measures differs, as will be ex-
ity risk of the job by both the worker plored below.
and the firm. In practice, researchers A fundamental issue is how systematic
have a less perfect measure. Most studies biases in individual risk perception affect
have used information from available na- the market processes that give rise to
tional data sets that typically provide in- the compensating wage differential esti-
formation on several thousand workers mates.'6 A sizable literature in psychol-
and their jobs. These data sets include ogy and economics has documented bi-
detailed information pertaining to the ases in individual assessments of risk.
worker's demographic characteristics Individuals tend to overestimate low
(age, race, sex, years of schooling, health probability events, such as the chance
status, marital status, etc.), nature of em- of being struck by lightning, and to un-
ployment (wage rate, hours worked, in- derestimate risks of high probability
dustry, occupation, union status, years events, such as the chance of dying from
of experience, etc.), and place of resi- heart disease (see Baruch Fischhoff et al.
dence. The University of Michigan Sur- 1981).
vey of Working Conditions and Quality Because these biases are systematic,
of Employment Survey also included in- we know a great deal about their conse-
formation on the worker's job attributes, quences. In particular, the relationship
as perceived by the worker. Among these between perceived risks and actual risks
variables is whether the worker believes is similar to that displayed in Figure 2.
he faces hazards on his particular job. The perceived probability line CD lies
Usually, researchers have matched ob- above the actual probability level for
jective measures of the industry or occu-
pation risk to the worker based on his 16 Labor market estimates focus on the wage that
job classification. workersrequire to accept risks,whereaspolicy evalu-

The degree of refinement of these risk ations are based on willingness to pay for risk reduc-
tion. For sufficientlysmall risk changes, willingness-
variables varies. The pre-1971 Bureau of to-pay and willingness-to-accept values should be
Labor Statistics (BLS) death risk data are equal. One experimental study-Viscusi, Wesley,
Magat,and Joel Huber (1987)-found substantialdif-
published for three-digit StandardIndus- ferences in these valuationsfor risk changes on the
trial Classification (SIC) codes. Manufac- order of 5/10,000. When presented with risk changes
turing and nonmanufacturing industries in a survey context, individualsmay require a large
are both represented. 15 After 1971, the financial inducement to accept an increase in risk
from their accustomedrisk level that greatlyexceeds
BLS published death risk data for one- their willingness to pay for incremental reductions
digit SIC codes so that the available data in risk even though those tradeoff rates should be
became more aggregative. Unpublished identical.
The source of this influence appearsto be a percep-
death risk data by two-digit SIC code are tion bias on the part of survey respondents in which
also available from the agency. The Na- they overreact to newly identified risks. The survey
tional Institute of Occupational Safety results in Viscusi and Charles O'Connor(1984) and
Shelby Gerking, Menno deHaan, and William
and Health (NIOSH) death risk data are Schulze (1988) suggest that these effects may not be
available by one-digit SIC industry codes as great for job safety contexts, perhaps in part be-
for each of the states. The Society of Ac- cause workers'familiaritywith job risks make them
less alarmed by informationregarding a minor in-
tuaries fatality data are based on occupa- crease in risk. Explicit estimates that do this in the
tional fatality risks rather than industry case of worker injury risks are provided in Viscusi
risks, and 37 occupations are represented and Evans (1990). Indeed, this effect is borne out
in the behavior of society at large in terms of the
in these data. The performance of these frequent overreactionto small, but highly publicized
risks. If, however, the risk changes are of more than
a modest incremental amount, then the curvature
" Government employees are not, however, in- of the constantexpected utility locus shownin Figure
cluded in the BLS or NIOSH data. 2 will also affect the tradeoffrate.

Perceived To isolate the wage premium for risk,
Perobaili Actual =
probability
Probablity Perceived
probability
the wage equation should include other
attributes of the worker's job. Jobs that
P erceived are risky tend to be unpleasant in other
Fl?- - - - - - - - - probability
- ---- -'
respects. One such variable is the other
Bl
component of job risk-the nonfatal risk
q indicated in equation (1). Inclusion of
this variable is sometimes difficult either
because of the correlation between the
* I I I Actual
? AO Bo Fo Probability death risk variable and the nonfatal risk
measures or because the differences in
Figure 2. Relation Between Actual and
Perceived Probabilities the data sources and the reference popu-
lations for which these data have been
gathered may make it difficult to include
small risks and under this amount for both variables simultaneously. As a re-
large risks. The role of risk perceptions sult, few studies in the literature include
is to decrease the risk change that indi- both risk measures. The exclusion of the
viduals associate with any incremental nonfatal injury variable may lead to an
change in the risk. Thus, in the case of upward bias in the estimated coefficient
a job that poses some specific incremen- for the fatality risks if the death risk vari-
tal risk AOBOto the worker in Figure 2, able's coefficient captures the omitted in-
the worker will perceive this incremental fluence of the premiums for nonfatal
increase to be a lower amount A,B, and risks, which should be positively corre-
will consequently demand less compen- lated with fatality risks.'9 In addition, a
sation than he otherwise would.'7 In bias may result if the probability of injury
terms of the estimated compensating dif- is positive but the death risk is zero.
ferential, workers will demand less com- Another key risk-related variable is the
pensation per unit of actual risk that they workers' compensation variable indicated
face because the risk increase is greater by qWC in equation (1). What is perti-
than they believe it to be. The value of nent to the worker is the expected work-
dwlp will be smaller at any given value ers' compensation benefit.20 Most of the
of p (see Viscusi 1990), thus influencing early studies in the compensating differ-
the market equilibrium locus that is esti- ential literature did not include a work-
mated. The net effect on the estimated ers' compensation variable, but it has
value of XX depends on how these been included in several recent studies
changes in the EUi interact with the discussed below. This ex post compensa-
available offer curves. In addition, ran- tion variable ideally will be in terms of
dom measurement error in the risk vari- the expected workers' compensation
able would tend to bias the estimated benefit or some other form (e.g., ex-
tradeoffsdownward, but systematic mea- pected rate of replacement of lost earn-
surement error could lead to a bias in
either direction. 18
upwardbias that arises if the study omits other non-
pecuniaryattribute variables.
17 For a more formal explorationof these issues, 19Viscusi(1978a)presents estimates with and with-
see Viscusi (1990). out such control variables.
18Comparison of the BLS and NIOSH data in 20 More formally, what the worker is truly con-
Mooreand Viscusi(1988a)suggests that the measure- cerned with is the insurance premium he is willing
ment error is not random in the case of the BLS to pay for workers' compensation benefits. The ex-
data, if we use the NIOSH data as the reference pected workers'compensationvalue capturesthis for
point. Other biases also may be present, such as an a risk-neutralworker.

ings) that takes into account the probabil- choice situation should prefer the less
ity that the worker will actually collect precisely understood risk because they
the benefits. If the worker faces a job can quit if they acquire sufficiently unfa-
that poses zero risk, then workers' com- vorable information about the risk, and
pensation benefits offer no expected wel- they can remain on the job if they acquire
fare benefit, and consequently there will favorable information. Employers may
be no compensating differential. also respond to this quitting by raising
A related issue is the role of worker worker wages to retain experienced
uncertainty. Apart from the fact that we workers who are aware of the risk. Em-
do not know exactly what workers' risk pirically, the net effect is that more expe-
perceptions are, there is the additional rienced workers on hazardous jobs re-
problem that these perceptions may not ceive higher compensating differentials
be precise. Thus, workers have a subjec- (see Viscusi and Moore 1991).
tive risk perception pertaining to the haz-
Recognition of the Duration of Life
ards posed by a job, but these percep-
tions may not be as tight as an objective The standard hedonic wage equation
probability. includes the probability of death, but the
The main consequence of this uncer- amount and quality of life at risk differs.22
tainty for workers is to increase the likeli- For the typical healthy worker, the major
hood of a worker quitting once he learns difference across individuals will be in
about the adverse properties of a job and terms of the quantity of life at risk. A
revises his prior risk beliefs. This quit 20-year-old worker faces a more substan-
effect can be viewed as a generalization tial loss from a given fatality risk than a
of the theory of compensating differen- 60-year-old worker. An offsetting influ-
tials to a situation of worker uncertainty ence that should also be taken into ac-
and adaptive behavior (Viscusi 1979; Vis- count is that there may be age-related
cusi and O'Connor 1984). One measure differences in the proclivity toward risk
of the magnitude of this effect is that if taking, some of which may be attribut-
all industries eliminated their job risks, able to differences in family structure.
holding constant other aspects of the job Age clearly is a factor that may potentially
including wages, it would reduce the affect where along the market equilib-
manufacturing industry quit rates by rium curve XX a worker is located. If
one-third.21 On a theoretical basis, the XX is nonlinear, then age may also affect
opportunity for learning and adaptive be- the slope. Worker age may also influence
havior should lead workers to demand the offer curves workers face as well.23
less compensation per unit risk than they The simplest approach to addressing
would if they were fully informed about the life duration issue is to include a fatal-
the probabilities even if this information ity risk variable interacted with worker
did not alter the assessed risk level (see age, i.e., p x worker age. This approach
Viscusi 1979). The reasoning behind this is used in Thaler and Rosen (1976) and
result is that workers in a sequential job
22 RichardZeckhauserand Donald Shepard(1976)
develop a quality-adjustedvalue-of-life concept to
21Wages, of course, would also change in a com- recognize quantity and quality differences. Econo-
petitive market.This estimate is based on the impli- mists have had more success at estimating quantity
cations of quit rate regressions using data from the differencesthan quality differences.
University of Michigan Panel of Income Dynamics, 3 Althoughthe earliermodels with age interaction
as reported in Viscusi (1979). The one-third figure terms did not attempt to sort out both sets of influ-
(moreprecisely, 35%is calculatedusing these results ence, the structuralmodels discussed below attempt
in Viscusi 1983, pp. 67, 182). to do this.

Viscusi (1979), with evidence of a signifi- A more elaborate alternative is to de-

cant negative age-risk interaction. velop a model of lifetime job choice from
A refinement of this approach is to in- which is derived a functional form for
clude a variable that reflects the expected the worker's decision to engage in poten-
years of life lost, such as p x life expec- tially hazardous work. Rosen (1988) and
tancy. This variable would capture two a series of papers by Viscusi and Moore
influences at work. First, younger work- (1989) and Moore and Viscusi (1990a,
ers have a longer future life at risk. Sec- 1990b, 1990c) have explored these mod-
ond, as we age, the expected date of els. By using a structural model of the
death conditional upon our age is pushed job choice process, these analyses ideally
out. distinguish differences in worker prefer-
Although the life expectancy approach ences from worker characteristics that af-
represents a refinement of simply inter- fect the market offer curve available to
acting worker age with death risks, it these workers.
does not recognize the role of discounting Two general approaches have proven
with respect to the years of life at risk. estimable. 25 One is to estimate a standard
Instead of estimating the coefficient for life-cycle consumption model, with the
a variable pertaining to the worker's life main difference being that the model rec-
expectancy, one would prefer to estimate ognizes that there is a probability in each
the discounted loss in life expectancy, period that the consumption stream may
so that the job risk variable takes the form be terminated. The alternative is to con-
p(l - e-rT)lr, where r is the rate of dis- struct a lifetime decision model, where
count and T is the remaining period of the worker selects the optimal job risk
life. Assuming that the only affect of age from the wage offer curve, where this
is to influence the character of worker risk affects the probability of death in
preferences, not firms' offer curves for each period. One example of the latter
risky jobs, estimation of such a model approach is the Markov decision model
yields an estimate of the implicit value in Viscusi and Moore (1989).26 In select-
of life, the implicit value per discounted ing their optimal job risks, workers deter-
expected life year lost, and the rate of mine their life expectancy.27 After as-
time preference that workers use in dis- suming an explicit functional form for the
counting years of life. Including the dis-
counted expected loss in life expectancy 25 Rosen's (1988) paper does not estimate the life
in equation (1) in lieu of the job risk varia- cycle model directly, but uses the results of Thaler
ble p produces an estimated rate of time and Rosen (1976) in conjunctionwith the model to
preference of 10-12 percent with respect obtain estimates of the key components of interest.
26 This variantof the model will exclude causes of
to expected life years (Moore and Vis- death other than one's job to simplifythe exposition.
cusi 1988b). As in the case of wage- 27 More specifically, let the utility of death equal
risk tradeoffs, the presence of hetero- to zero and assume that the worker faces a time-
invariantsequence of lotteries on life and death. To
geneity of worker preferences will make recognize the dependence of the job risk data on
this estimate a nonlinear weighted worker i's reported industry j, pi will be used to
average of the individual workers' pref- denote the pertinent fatalityrisk level. Workeri se-
lects the optimal death risk pij from the available
erences.24 opportunitieslocus w(pi;) to maximizediscounted ex-
pected lifetime utility
24 Some of the more importantsources of hetero- 00
geneity can be ascertainedthroughinteractionterms. G = U(w(py))(1 - pij) , [1(1 - PY)Y_1

For example, college-educatedworkersexhibit lower
rates of time preference than those with less educa- where t indexes time periods and 1 is the discount
tion, as one might expect. factor (the inverse of 1 plus the interest rate).

utility function (i.e., a constant relative term, and the cxkare coefficients on the
risk aversion utility function, a + bwc), taste-shifter variables to be estimated.
Viscusi and Moore (1989) estimate a two- The value of a Inwilapijis computedfrom
equation structural system based on the the first stage market wage equation.
local tradeoffimplied by the optimization This general estimation approach follows
problem in which the worker selects the the procedure advocated by Kahn and
optimal fatality risk, and a wage equation Lang (1988) and Biddle and Zarkin (1988)
characterizing the market opportunities to estimate structural hedonic systems.
locus.28 For worker i in industry j with In all such models, the worker selects
market opportunities affected by vari- the optimal job risk pij from among a
ables xim, the market implicit price equa- schedule of wage-risk combinations in
tion takes the form the workplace. From this optimization
4 problem is derived an explicit functional
In wi = > (@kRikPij + BkRIkPi1) form that relates the worker's rate of
k=l tradeoffawilapij to variousaspectsof the
M
job choice problem, including the job
+ > +11xi, + {i (2) risk pij, the discount rate, and in models
ni1=1
based on a finite time horizon, the work-
where the Rik are regional dummy vari- er's remaining life. Some models also in-
ables, the first summation is over the four clude a probability of death from causes
geographical regions, El is a random error other than the job to reflect the fatality
term, and 4)k Bk, *Pm are coefficients to risks that a worker faces throughout his
be estimated.29 The worker decision life. This nonlinear equation (3) is cou-
equation generated by this particular pled with a second market wage equation
model is (2) to complete the structural equation
In w system. The estimated discount rates
In wi= (1 1 Pij) range from 1 to 14 percent, which are
broadly consistent with financial rates of
N
return that one might use as a reference
+ > OtkXik+ E2, (3) point in assessing the rationality of inter-
n=l
temporal choices.
where v is the discount factor 1/(1 + r)
to be estimated, E2 is a random error Estimation of Utility Functions
' Identificationremainsan issue. Regionaldummy Knowledge of the shape of worker util-
variablesare used to identify the marketwage equa- ity functions rather than a local tradeoff
tion based on the assumption that these variables rate along a constant expected utility lo-
indicate geographicallydistinct labor markets, but cus would provide the basis for more de-
do not affectworkerpreferences.These regionalvari-
ables include interactionswith the linear and quad- tailed judgments. For example, it makes
ratic job risk variables. This identification issue is possible analysis of variations in the value
present in hedonic price models as well. See Dennis of life with respect to income levels and
Epele (1987).
2 This equation differs from equation (1) in that assessments of valuations of nonmarginal
the death riskand (deathrisk)2variablesare included changes in risk. The utility function mod-
by region. The nonpecuniaryrisk variable q and its els are based on two different state-de-
interactionwith workers'compensationdoes not ap-
pearbecause the NIOSH riskdatapertainto fatalities pendent utility functions. In the good
only. More generally, the hedonic wage equation health state 1, the utility function is U(w),
focuses on both supply and demand factors,whereas and in the ill health state, the utility func-
structuralmodels attempt to distinguish factors re-
flecting tastes and opportunitiesusing separateequa- tion is V(y), where y is the benefit paid
tions for each. upon death. One can make y a function

of w. In the case of fatality risks, V(y) Income EU
represents the worker's bequest func- D c A

- --------- -
tion, which can equal zero if the worker Wb-
has no beneficiaries. -
B
Wia-- - - - - - -
Estimating utility functions involves a
quite different estimation procedure than EU I I
wa I I
the hedonic wage equation approach,
and it utilizes a different type of data as l I
well. The concern is no longer with trac- AII
ing out the locus of tangencies involving
a firm's offer curve and an individual qaJobRiskqb
worker's constant expected utility locus. Figure 3. The Market Offer Curve and the
Worker'sExpected Utility Locus
Rather, the focus is on information pro-
vided by two or more points along a par-
ticular worker's constant expected utility and Yb, can be computed using Wa, Wb,
locus. Because natural market experi- and workers' compensation benefit for-
ments do not provide such information, mulas for the worker's state of residence.
researchers have used survey evidence The survey addresses the components of
regarding the stated compensating differ- the following equality:
entials that the worker would require if
(1 - qa) U(Wa) + qaV(Ya)
faced with a change in job risk. This pro-
cedure leads to estimates of the state- = (1 - qb)U(wb) + qbV(yb). (4)
dependent, von Neumann-Morgenstern All the elements of equation (4) are ob-
utility functions U(w) and V(y) up to a servable except for U and V. One must
positive linear transformation. impose some structure on the utility
Viscusi and Evans' (1990) procedure functions to make estimations of them
uses worker survey data from four chemi- feasible. If we assume a specific func-
cal firms that provides informationon two tional form for the utility functions (e.g.,
equivalent jobs a and b along a constant logarithmic) or use a Taylor's series ap-
expected utility locus, such as EU in Fig- proximation to the general utility func-
ure 3. This curve is tangent to the market tion, then we can solve equation (4) for
offer curve ABC. The worker reports his the wage increase required by the worker
current wage rate Wa and his assessed to face the new risk, yielding an equation
job risk qa using a linear scale comparable that can be estimated with nonlinear re-
to the BLS injury risk metric. The worker gression methods.3' If we observe more
is then given a hazard warning for a than two points on a constant expected
chemical and told that this chemical
would replace the chemicals with which 3' Let Wb = (1 + 8)wa, where 8 is the percentage
he now works.30 The worker then as- wage premium for the higher risk on job b. The
sesses the risk qb associated with the dependent variable in the model is 8. For the first-
transformed job and the wage rate Wb order Taylor'sseries expansionvariantof the model,
the parameters to be estimated are 1 = U(wa) -
he would require to remain on EU. The V(Wa), 2 = U'(Wa), andP3 = V'(Wa). Thus,the esti-
income replacement after an injury, ya mationfocuses on three parametersthat characterize
the nature of worker preferences. With no loss of
generalityone can set I2 = 1 because von Neumann-
'The chemicals used were TNT, asbestos, chlo- Morgenstern utility functions are not altered by a
roacetophenone,and sodium bicarbonate.The warn- positive linear transformation,leaving two parame-
ings conformedwith current industrypractice given ters to be estimated. One can also make I, and 3
the propertiesof these chemicals.The originalsurvey functions of personal characteristics,such as educa-
results appearin Viscusi and O'Connor(1984). tion. See Viscusiand Evans (1990)for furtherdetails.

utility locus, as in Evans and Viscusi lems. Potentially substantial measure-

(1991), then we have an ability to esti- ment error arises when the researcher
mate utility functions characterized by a creates the nonpecuniary characteristic
larger number of parameters. variables by matching to the worker ob-
The utility function estimation proce- jective measures of job attributes, such
dure can explicitly recognize the role of as fatality rates, based on the worker's
individual heterogeneity by making the industry or occupation.33
parameters of the utility function depen- The studies listed in Table 2 differ in
dent on worker characteristics.32 This a variety of respects, including the data
ability to distinguish differences in pref- sets as well as the wage equation specifi-
erences stems in part from use of data cation. The initial studies in the literature
that does not confound the influence of consisted almost entirely of simple re-
worker and firm decisions. Only the in- gressions of wage rates on risk levels,
formation on multiple points (pi,w) along possibly interacted with worker age. Be-
the worker's constant expected utility lo- ginning with Moore and Viscusi (1988b)
cus is used. Estimates involving variation there was an attempt to estimate the
across a broad sample of worker charac- tradeoff for discounted expected life
teristics makes possible the estimation of years lost. The starkest difference among
the dependence of the utility function the studies consists of the structural esti-
parameters on personal characteristics. mation approach that is employed in dif-
fering degrees in some of the most recent
studies listed in the table.34
3. Review of Risk Tradeoffs The structural models focusing on the
in the Labor MarketLiterature duration of life at risk assist in illuminat-
Although the methodology for estimating aspects of the lifetime job choice
ing the labor market value of life is problem, such as workers' implicit rate
straightforward, the empirical estimates of discount. However, the additional in-
differ substantially. Table 2 summarizes formation comes at a cost. The estimation
24 principal labor market studies of the procedures often are quite complicated,
implicit value of life, where these valua- and considerably greater demands are
tion estimates are all in December 1990 placed on the data. The risk-dollar
dollars. These studies appear in chrono- tradeoff estimates have been less robust
logical order. Robert S. Smith (1974) for these models than more straightfor-
used industry-level data to estimate wage ward estimation approaches, such as
premiums for risk, but the other studies those following equation (1). As a result,
in Table 2 used individual worker data. I place greater emphasis upon the more
The advent of large micro data sets on conventional wage equation estimates of
individual worker behavior enabled the risk-wage tradeoff than on the find-
economists to isolate the role of job risks
3It should be noted that Charles Brown's (1980)
from factors such as education and expe- effort entailed an ambitious matchingof detailed in-
rience. As Charles Brown (1980) has ob- formationfrom the Dictionary of OccupationalTitles
served, even large micro data sets do not to the workers. Another innovation is that he used
panel data from the National Longitudinal Survey
always resolve these estimation prob- YoungMen's sample to link wage changes to changes
in job characteristicsin an effortto controlfor omitted
differencesin worker ability.
32 For the logarithmic utility function case, one 3' There were antecedents to these structuralmod-
might, for example, set the utility of injury equal to els, but not involving fatality risks. See James N.
ln(w), and the utility of good health equal to (a + Brown (1983), Kahn and Lang (1988), and Biddle
f31Education + P2 Age + ,B3Sex)ln(y). and Zarkin(1988).

ings yielded by the structural estimation for whether the worker's job poses any
models. health and safety risks, can be interacted
Although many of the studies listed in with some objective measure of the risk
Table 2 consist primarily of replications po to create a potentially more refined
and consistency checks on earlier results, estimate of the risk variable (p8 x po),
there have been a number of important as in Viscusi (1978a, 1979) and Moore
innovations in the literature. The col- and Viscusi (1988b).
umns in Table 2 summarize several sa- Gegax, Gerking, and Schulze (1991)
lient dimensions of these studies. All ex- use a continuous measure of the worker's
cept four of the studies rely upon large subjective risk of fatality derived from
U.S. data sets, and all but two of these an interview approach analogous to the
studies use national surveys of worker Viscusi and O'Connor (1984) study of
behavior. nonfatal job injuries. However, the risk
scale they presented to workers ranged
Choice of the Job Risk Variable from 1/4,000 to 10/4,000.37 Because the
average U.S. fatality risk of 1/10,000 lies
Because all of these surveys include outside the range, the risk interval used
most of the demographic and job charac- was likely to generate overestimates of
teristic information needed to estimate the job risk. Not surprisingly, their re-
the wage equation, the main distinguish- spondents' assessed job risks were very
ing feature is the manner in which the high; their white-collar subsample as-
risk variable is created. None of the sets sessed the annual job fatality risk as
of survey data listed includes any objec- 1/2,000.38
tive measure of the risks posed by the The dominant approach followed in the
worker's particular job. Nor do the risk literature is to rely upon some published
data distinguish which injuries are attri- measure of the risk level by occupation
butable to the job environment and or industry, and then to match this risk
which arise solely from worker actions.35 variable to the worker in the sample us-
The University of Michigan's Survey of ing information provided by the respon-
Working Conditions and Quality Em- dent. The study by Thaler and Rosen
ployment Survey each include a subjec- (1976) used Society of Actuaries data per-
tive risk variable, which ascertained taining to the risk associated with differ-
whether the worker views the job as pos- ent occupations, as did Charles Brown
ing dangerous or unhealthy conditions.36 (1980) and Arnould and Nichols (1983).
The subjective risk perception variable These data pertain primarily to high risk
PS, which is a 0-1 dummy variable occupations with average annual risks of
death on the order of 1/,000-roughly
`5Making such distinctions is difficult because ten times the average for the U.S. work-
workplace technologies and worker safety precau-
tions jointly determine the risk. If all accidentswere
due to worker carelessness and would have arisen
in all other contexts in which the worker was em-
ployed, then no wage premiums for risk would be 3 Respondents could select one of ten integer re-
observed. sponses rangingfrom 1/4,000 to 10/4,000. The aver-
' These data sets have been analyzed by Viscusi age U.S. job fatalityrisk is not in this range.
(1978a, 1979), Dillingham (1985), Leigh (1987), and 3 The upwardbias in risk assessments in turn will
Moore and Viscusi (1988b), but not all of these re- tend to produce low estimates of the value of life,
searchershave used the subjectiveriskvariable.Also as appears to be the case. The higher value-of-life
see the nonfatal risk study of Biddle and Zarkin estimates for changes in risk generated by the same
(1988). None of the data sets include measures of survey instrument, as reported in Gerking, deHaan,
the employer's perceptions, which are relevant to and Schulze (1988), are also consistent with overesti-
the shape of the offer curve. mation of the base job risk level.

Q :s; ? Q Ej ~~~~?
z e z oo.???o>?;0~~~z
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3 z3z z z z z z z z z z o
z m ~~~~~~~~~~~~z
m m z z zm m m
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place. To the extent that workers who over time.40 After the advent of the
select themselves into high risk jobs have OSHA, the reporting system for all inju-
a lower risk-dollar tradeoff than workers ries changed so that BLS risk data begin-
in higher risk jobs, one would expect to ning in 1972 are not comparable with the
obtain lower value-of-life estimates in earlier data. Studies such as Robert S.
studies that use these data, as Thaler and Smith (1974, 1976) and Viscusi (1978a,
Rosen (1976) recognize.39 In addition, 1979) use the pre-OSHA industrial fatal-
the Society of Actuaries data pertain to ity data, whereas more recent studies us-
all incremental mortality risks associated ing BLS data have relied upon the post-
with people in 37 different occupations, OSHA data.
not simply the job-specific risk. Thus, The main deficiency of industry-based
this variable also reflects risks other than data is that they pertain to industry-wide
those on the job, which would not be averages and do not distinguish among
compensated through the wage mecha- the different jobs within that industry;
nism. Actors, for example, have a very perceptional differences in risk are also
high mortality rate. not recognized. To promote greater per-
The lower value-of-life estimates ob- tinence of the risk measures to the jobs
tained using the Society of Actuaries data in the survey, some researchers have re-
rather than data for workers in less risky stricted the sample composition by, for
jobs is consistent with the self-selection example, limiting it to males or blue-col-
of individuals with low risk-dollar lar workers, for whom the risk data are
tradeoffs into the most hazardous pur- more relevant."1Additional limitations of
suits. The substantial variation in the the BLS data are that the reporting may
value-of-life estimates in Table 2 with the not be complete, and occupational dis-
risk level, which is a consequence of the eases are underrepresented.
joint influence of worker and firm hetero- The National Institute of Occupational
geneity, suggests that one should exer- Safety and Health sought to reduce the
cise substantial caution in extrapolating measurement error associated with the
estimates across risk ranges. industry level fatality data through its Na-
Twelve of the studies listed in Table tional Traumatic Occupational Fatality
2 use the BLS risk data based on the Survey. This survey yielded new data on
risks associated with different industries. industrial fatality rates that have been
The BLS risk measure is positively cor-
related with workers' subjective risk as-
sessments in the Survey of Working Con- 40An interesting and so far unexplored issue is
whether the change in the BLS reporting system
ditions. Moreover, the BLS objective altered the risk data in a manner that affectedwork-
industry risk measure and the worker- ers' risk beliefs. The most that is availableis a com-
specific subjective risk variable yield esti- parison of the wage premiums generated by the dif-
ferent risk measures.
mates of the annual risk premium that 41 Manystudies have obtained significantestimates
are not significantly different from one of wage premiums without such restrictions. How-
another (see Viscusi 1979a; Viscusi and ever, there remainsan importantneed both for better
risk measures as well as more detailed assessments
O'Connor 1984; and Gerking, deHaan, of the value of other nonpecuniary aspects of the
and Schulze 1988). job so that the estimates will represent premiums
The BLS risk measure has changed for risk ratherthatjob attributescorrelatedwith risk.
The Quality of Employment Survey and Survey of
WorkingConditionsdo provide detailed nonpecuni-
39 Some initial efforts to address the role of these ary attributedata, but the risk variableis categorical
worker differences included the interaction of the (does the worker'sjob expose him to dangerous or
risk variable with demographiccharacteristicvaria- unhealthy working conditions?)rather than continu:
bles. ous.

TABLE 3
is consistent with the effect of greater
FATALITY RATE DATA BY INDUSTRY
random measurement error with the
BLS measure offsetting the influence of
BLS Fatality NIOSH Fatality the underreporting of injuries with the
Rate per Rate per BLS data.42
100,000 100,000
Industry Employees Employees Nonfatal Risks and
Other Job Attributes
Mining 35.4 30.1
Construction 23.9 23.1 An important dimension on which the
Agriculture, Forestry, studies in Table 2 differ is the set of other
and Fisheries 17.5 20.3 job characteristic variables included in
Transportation,
Communication, 16.8 19.5
the equation. Omission of nonpecuniary
Electricity attributes of the job may bias the esti-
Manufacturing 4.2 4.2 mated risk coefficient. Most studies at-
Retail Trade 2.9 1.8 tempt to control for these influences us-
Wholesale Trade 2.9 1.1 ing sets of occupational or industry
Services 2.4 2.9
Finance, Insurance,
dummy variables. In addition, several of
Real Estate 1.9 1.3 these studies include a measure of the
Public Sector NA NA nonfatal risk associated with the job.
The studies by Viscusi (1978a, 1979)
Source: Bureau of Labor Statistics (1985), using data were the first to obtain an estimate of a
for 1982-1983 combined; and data from the National
Institute for Occupational Safety and Health (1987).
statistically significant value of compen-
NA = Not Available sation for injuries as well as fatalities.
These studies also included a compre-
hensive set of nonpecuniary job charac-
used in four recent studies by Moore and teristics, including whether the worker
myself, which are reported at the end was a supervisor, the speed of work,
of Table 2, and by Kniesner and Leeth whether the worker made decisions on
(1991). the job, whether the job requires the
Table 3 summarizes the BLS and worker not make mistakes, job security,
NIOSH fatality rates per 100,000 work- overtime work, worker training, and a
ers for majorindustry groups. The overall dummy variable for the worker's occupa-
size of the risk is on the order of 1/10,000, tion.
with agriculture, mining, construction, The chief recent addition to the wage
and transportation representing above equation has been the inclusion of a
average risk industries. The direction of workers' compensation variable, begin-
the risk differences between the BLS and ning with the studies by Butler (1983)
NIOSH data varies by industry. Differ- and by Arnould and Nichols (1983). In
ences in sampling procedure may ac- practice, inclusion of this variable has
count for the discrepancy. The BLS data raised the estimated wage-risk tradeoff.
are based on a sample of industry reports Although most studies in the literature
to the agency, whereas the NIOSH data have used state average benefit mea-
are based on a comprehensive census of
death certificates to identify job-related 42
See Moore and Viscusi (1988a). Suppose that
fatalities. In practice, the main difference we observe q * instead of measuring the actual risk
is that estimates of the wage-risk tradeoff of qi, where q * = qi + vi. The usualrandommeasure-
ment errormodel assumptionis that vi has zero mean
based on NIOSH data are roughly twice and constant variance, in which case the coefficient
as large as those of the BLS data, which on q * will be biased downwardfrom its true value.

sures, Viscusi and Moore (1987) and their spect to earnings, which was approxi-
subsequent work included an individual- mately 1.0. The calculations below as-
specific workers' compensation variable sume that a unitary income elasticity also
calculated based on the state benefit for- pertains to aw/lp.
mulas in conjunction with the worker's To see how one might apply the value-
demographic characteristics. This vari- of-life estimates to a different group, sup-
able was interacted with the risk on the pose that we are valuing the benefits
worker's job so that it was the expected from improved aviation safety. The aver-
workers' compensation benefit (or more age passenger on a U. S. airline has a me-
specifically, the expected rate of replace- dian income level of $32,840, which is
ment of lost earnings), which is a more considerably higher than the income lev-
pertinent measure than the overall state els listed in Table 2 (see The Gallup Or-
benefit average. ganization 1989). Extrapolating Thaler
and Rosen's (1976) values to this income
Survey Differences
group would yield a value per life of $1.0
in Worker Earnings Levels
million.43 Those in Viscusi (1978a, 1979)
As the average earnings level data in would rise to $5.7 million. The results
Table 2 indicate, the sample composition from the U. K. by Marin and Psacha-
has varied considerably. This distinction ropoulos (1982) would be even high-
is important because what these studies er-$8. 1 million-even though their es-
yield is an estimate of the implicit wage- timates for workers in the U.K. are lower
risk tradeoffthat is pertinent to a particu- than in most studies of U. S. workers. The
lar segment of the population and cannot final column in Table 2 summarizes the
necessarily be generalized to the popula- implied value-of-life estimates for the
tion at large. The standard ex post mea- typical airline passenger.
sure of economic damages for acci-
The Value-of-Life Range
dents-the present value of earnings-
varies proportionally with income. One As the implicit value-of-life estimates
would also expect some earnings varia- in Table 2 indicate, the estimated wage-
tion in the wage-risk tradeoffs, which are risk tradeoff varies considerably across
related to the compensation required for data sets and methodologies. Some het-
injury prevention. In particular, if w, p, erogeneity is expected. The value of life
and q are defined in terms of annual earn- is not a universal constant, but reflects
ings and annual risk, then the tradeoff the wage-risk tradeoff pertinent to the
awlap is the implicit value per statistical preferences of the workers in a particular
life and awlaq is the implicit value per sample. The mix of workers in these sam-
statistical injury. Viewed somewhat dif- ples is quite different. The majority of
ferently, the statistical value of life is the the estimates in Table 2 are in the $3
total amount of compensation n workers million-$7 million range.
would require to face one expected death The results that I place the greatest
from their group, where n is a large num- reliance on for the typical worker are
ber. The implicit values of life evaluated those in Viscusi (1978a, 1979), which in-
at the sample mean risk levels appear clude the most comprehensive set of non-
in the second-to-last column of Table 2.
Using survey data that provided informa- 43These calculationsused the income levels and
tion on the two points along EU indicated value of life estimates reported in Table 2 and scaled
up the estimates proportionallywith the income of
in Figure 3, Viscusi and Evans (1990) cal- airline passengers relative to the average sample
culated the elasticity of awlaq with re- member's income.

pecuniary characteristic variables, and gathered by government agencies that

the NIOSH data results in Moore and covers both classes of accidents. At-
Viscusi (1988a). Other studies are better tempts to include a NIOSH fatality risk
suited to estimating the value of life for variable in equations with BLS nonfatal
workers in high risk jobs (Thaler and Ro- risk measures have thus far not led to
sen 1976) or workers in other countries. significant estimates for both sets of coef-
Perhaps the best way to interpret these ficients, perhaps due in part to the differ-
studies is that there is a value-of-life ent reporting bases and methodologies
range that is potentially pertinent. The used in gathering these accident statis-
wage-risk relationship is not as robust as tics. Exclusion of the fatality risk measure
is, for example, the effect of education from a nonfatal risk equation will tend
on wages.44 to bias the estimates of the fatality risk
premium upward, whereas random mea-
4. The Implicit Value of Injury Based surement error that arises from matching
on Labor Market Studies up an industry injury risk measure to an
individual based on the reported indus-
Estimation Issues
try will tend to bias the estimated value
As in the case of fatalities, the principal of the injuries downward.
source of evidence on risk-dollartradeoffs
Estimates of Wage-Injury
for nonfatal injuries is labor market data.
Risk Tradeoffs
The procedure for measuring the wage
premium for nonfatal risks parallels that Table 4 summarizes 17 studies that
for fatalities. have estimated statistically significant
Ideally, one would like to distinguish wage premiums for job injury risk, where
the compensation for fatality risks from these are the awlaq values evaluated at
that for nonfatal risks. In practice, esti- the mean sample risk.45 For 14 of these
mation of significant wage premiums for 17 studies it is possible to compute an
both a fatal risk measure and a nonfatal implicit value of job injuries based on
risk measure has proven difficult. the data presented by the authors.46
Two types of problems arise. First, if The studies in Table 4 do not pertain
there is a strong positive correlation be- to a homogeneous class of nonfatal inju-
tween fatal and nonfatal risk measures ries. In some cases, the injuries reflect
for the industry, which are then matched only those accidents that led to a loss in
to the individual worker, then it will be work, whereas in other instances less se-
hard to disentangle the premiums associ- 4 Some researchershave reportedthat statistically
ated with each of these risk measures. significantestimates could not be obtained. For ex-
Second, recent studies have begun to ample, Moore and Viscusi (1990a)estimated signifi-
rely upon the NIOSH fatal accident data cant premiumsfor fatalitiesbut not for nonfatalinju-
ries when the BLS nonfatal accident risk variable
rather than the BLS accident data. Be- was added to a regressionincludingthe NIOSH death
cause there is no nonfatal injury variable riskvariable.The differentsourcesfor and definitions
of the two risk measures create potential problems
counterpart to the NIOSH data, whereas of multicollinearity.
there was such a counterpart for the BLS 46 For example, one cannot estimate the implicit
data, there is no ideal pair of variables value of an injury for a log wage equation without
knowingthe averagewage level in the sample. Daniel
Hamermeshand John Wolfe (1990)obtain significant
4 Onepossiblepolicyapproach mightbe to calcu- estimates of the wage premiums for the frequency
latethe discountedcostsper expectedlife savedand and duration of injuries, but they do not report an
then to ascertainwhetherthis figureis reasonable estimate of the implicit value of an injury. They do
given the rangeof plausiblevalueof life estimates find a stronger effect of injury duration than injury
thathavebeen obtainedin the literature. frequency.

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vere injuries may be included. There are donic wage equation approach are those
other differences as well, as some sets that have attempted to explore more fully
of injury data pertain to average reported the character of individuals' utility func-
industry risk levels, whereas others are tions. Biddle and Zarkin (1988) at-
subjectively assessed injury risks. tempted to impose greater structure on
The first of the injury variables used the estimation process by taking into ac-
was the BLS injury rate data gathered count the constraints imposed by the tan-
before the advent of the OSHA and the gency of individual utility functions with
institution of the new reporting system the market offer curve. They jointly esti-
(see Viscusi 1978a, 1978b, 1979). The mate a two-equation structural system
second injury variable used is the total similar in spirit to that described above
BLS reported accident rate. Studies us- for Viscusi and Moore (1989). The first
ing these data capture all job injuries, equation is the hedonic income locus-
including those that are not severe the envelope of the firms' isoprofit curves
enough to lead to the loss of a day of for the annual income offers Y for jobs
work (see Viscusi 1981; Olson 1981; of different risk. The second equation is
V. K. Smith 1983; Leigh and Folsom the first-order condition that equates dYl
1984; Viscusi and Moore 1987; and Garen ap for the hedonic income locus and the
1988). To capture injuries of greater se- worker's utility function, which they as-
verity, some studies have used only the sume to be a translog utility function.
lost workday injury component of the re- The other nonfatal risk study that does
ported BLS nonfatal accident statistics not consider a standard wage equation
(see Viscusi and Moore 1987; and Knies- is Viscusi and Evans (1990). They explic-
ner and Leeth 1991). itly estimate individual utility functions
Two studies have used subjective risk in good and ill health following Equation
perception variables based on workers' (4) using survey data in which responses
assessed risk, where the risk scale pre- to a hazard warning and baseline job in-
sented to the workers was patterned after formation make it possible to observe two
the BLS objective risk measure de- points along a constant expected utility
scribed above. Viscusi and O'Connor's locus.
(1984) reference scale was based on the Several additional insights are pro-
overall reported BLS injury rate, and vided by knowledge of the individual
Joni Hersch and Viscusi's (1990) scale was utility functions. First, job accidents
based on the BLS lost workday accident lower the marginal utility of income.48
rate. These two studies provide the val- Job injuries consequently alter the struc-
ues of workers' subjective risk percep- ture of preferences and cannot be treated
tions that are the counterparts of the two as tantamount to a monetary loss. Their
currently maintained BLS injury rate estimates imply that less than full insur-
series.47 ance of income loss (i.e., 85 percent re-
The two exceptions to the standard he- placement rate) is optimal. Second, dif-
ferences between willingness-to-accept
47 Twootherstudieshaveusedotherriskdatathat values for risk increases and willingness-
are more specific in nature. Butler (1983) analyzed to-pay amounts for risk reductions of a
employment data for South Carolinaworkers using magnitude of.01 are very minor-under
workers'compensationdata for injuries that are se-
vere enough to be filed in the workers'compensation
system in South Carolina.French and Kendall(1992) 4 For the logarithmicutility functioncases Viscusi
relied upon Federal RailroadAdministrationinjury and Evans (1990) found that U(w) = 1.077 log w
rate data to derive estimates of the implicit value of and V(y) = log y, where the coefficient for log y
job injuries. was constrained to be unity (no loss of generality).

one percent. The extent of the risk implicit value of risk for different seg-
change is, however, consequential, as ments of the population, illustrating the
the implicit value per statistical injury influence of differences in preferences on
is much greater for large increases in estimated wage-risk tradeoffs. Their anal-
risk.49 Third, the paper estimated the ysis used both a conventional wage equa-
elasticity of the value of job injuries (mea- tion as well as a two-equation structural
sured in terms of the risk-dollar tradeoff model. Revealed differences in risk-tak-
awlaq) with respect to earnings as being ing behavior affect the risk premium esti-
approximately 1.0.50 This estimate was mates in the expected direction, as the
the basis for the extrapolationof the value implicit value of injury is $30,781 for
of injury statistics to reflect other earn- smokers, $56,537 for the full sample, and
ings levels in Table 2 and Table 4. Injury $92,245 for seat belt users.
valuation results for individuals with in- The two studies that report estimated
come comparable to that of airline pas- implicit values of injury obtained using
sengers appear in the final column of other types of data also yield similar esti-
Table 4. mates. After adjusting for income level
The wage-risk tradeoffs tend to be differences, Butler's (1983) results for the
greater for more severe types of injuries. typical airplane passenger imply an in-
Most of the estimates based on data for jury value of $34,794. The study of rail-
all injuries regardless of severity are clus- road worker injuries by French and Ken-
tered in the $25,000-$50,000 range. The dall (1991) yields an implicit value per
values obtained using the lost workday injury of $38,200-or $34,716 for the typ-
injury variable tend to be somewhat ical airplane passenger's income level-
greater. This risk measure excludes tem- which is very much in the range of the
porary injuries that are not sufficiently aforementioned studies of job injury.
severe to lead to loss of one or more days
of work. The value of lost workday inju-
ries is in the area of $50,000, or at the 5. Other Market Evidence
high end of the range for estimates for on Implicit Tradeoffs
the implicit value of injuries overall. The
subjectively assessed counterparts of the Other market transactions could be
total injury rate in Viscusi and O'Connor used to estimate the tradeoff value. In
(1984) and the lost workday risk in our consumption, transportation, and
Hersch and Viscusi (1990) also are consis- recreational activities, we take a variety
tent with these patterns. of risks. If the risk component and the
Hersch and Viscusi's (1990) study also offsetting benefits of these activities is
provides estimates of differences in the identified, then the money-risk tradeoff
may be estimated.
49For an annual accident probability change of The advantage of labor market studies
+.01, the implicit value of injury is $13,401 (loga- is that we observe the workers' incomes
rithmic utility) and $9,299 (Taylor'sseries), and for
a risk increase of +.915, these values rise to $20,777 and wages, and we have available risk
and $16,213 respectively. Valuations are in 1982 measures that distinguish risk levels
prices. across individuals. The main disadvan-
5 If we let w represent annual earnings, z be de-
fined as aw/dq,then the income elasticityof the value tage of the nonlabor market studies is
a
of injuries v is given by v = Tw . For logarithmic that either the risk facing the individual
or the monetary value of the attribute
utility functions, v = 1.10, and for a second-order
Taylor'sseries approximationto a general utility func- (e.g., travel time) is not observed so that
tion, v = .67. the researcher must impute at least one

TABLE 5
SUMMARY OF VALUE OF LIFE STUDIES BASED ON TRADEOFFS OUTSIDE THE LABOR MARKET
Component of Implicit Value

Nature of the Monetary Average Income of Life
Author (Year) Risk, Year Tradeoff Level ($ millions)
Debapriya Ghosh, Highway speed- Value of driver NA .07

Dennis Lees, & related accident time based on
William Seal risk, 1973 wage rates
(1975)
Glenn Blomquist Automobile death Estimated disutil- $29,840 1.2
(1979) risks, 1972 ity of seat belts
Rachel Dardis Fire fatality risks Purchase price of NA 0.6
(1980) without smoke smoke detectors
detectors, 1974-
1979
Paul R. Portney Mortality effects of Property values in NA-value of 0.8
(1981) air pollution, Allegheny Co., life for 42-
1978 PA year-old male
Pauline Ippolito & Cigarette smoking Estimated mone- NA 0.7
Richard Ippolito risks, 1980 tary equivalent
(1984) of effect of risk
information
Christopher Garbacz Fire fatality risks Purchase price of NA 2.0
(1989) without smoke smoke detector
detectors, 1968-
1985
Atkinson & Automobile acci- Prices of new auto- NA 4.0
Halvorsen (1990) dent risks, 1986 mobiles
Note: All values in December 1990 dollars.
component of the tradeoff. These studies of seven different studies in the litera-
consequently provide a less direct and ture. The tradeoffs involve the choice of
probably less reliable measure than labor highway speed, installation of smoke de-
market estimates. tectors, cigarette smoking, property val-
Nevertheless, even if the labor market ues, and automobile safety. Many of
estimates are more accurate reflections these choices involve discrete safety de-
of the market tradeoff, the evidence from cisions. Will the consumer purchase a
product markets is valuable as well. Ob- smoke detector? Such studies provide a
taining estimates of the value of life and lower bound on the value of life, but will
health in a variety of risk contexts should not provide information about the con-
enhance our confidence in the existence sumer's total willingness to pay for safety,
of such tradeoffs. Moreover, because because with such discrete decisions con-
these different risk contexts often involve sumers are not pushed to the point where
individuals with different preferences the marginal cost of greater safety equals
facing different magnitudes of risk than its marginal valuation.
those posed by jobs, this evidence is of A major difference among the studies
independent interest. is the observability of the monetary com-
Table 5 summarizes the components ponent of the tradeoff. An example of a

study that closely parallels the labor mar- rate, he estimates the annual disutility
ket analysis in terms of having reliable cost to be $45.S2 Blomquist's value-of-life
information on the monetary component estimate is lower than most labor market
of the tradeoffis that of Scott E. Atkinson estimates, perhaps in part because of the
and Robert Halvorsen (1990). The de- presence of other nonpecuniary costs
pendent variable in their hedonic price (e. g., discomfort) and possible driver un-
model is the car's purchase price, which derestimation of the risk reduction of seat
is the analog of the wage variable. The belt use. For example, Arnould and
explanatory variables consist of product Henry G. Grabowski (1981) find that
market counterparts of the job character- these precautions are suboptimal, given
istics (e.g., Consumer Reports ratings of the benefits and costs of seat belt use.53
comfort, EPA fuel efficiency ratings) and One explanation for possibly suboptimal
individual characteristics (e.g., age and precautionary behavior is that the per-
gender of drivers). The risk variable is ceived risk function is flatter than the
the occupant fatality rate for the automo- actual risk perception function in Figure
bile model, and the coefficient of this 2. Risk reductions from Bo to Ao are
variable defines the price-risk tradeoff, viewed as being a smaller amount-from
which they estimate to be $4.0 million B1 to A1. Such misperceptions will lead
per life. Their study provides the most individuals to take a suboptimal amount
comprehensive analysis of risk-dollar of precautions. Market estimates will un-
tradeoffs outside the labor market. derstate the implicit value of life that
Many of the other studies use imputed would prevail if individuals were fully ra-
values of the monetary component of the tional or informed.
risk tradeoff, potentially introducing an- Capital market contexts also may pro-
other source of error. Consider, for ex- vide evidence on the value of life. Ivy
ample, Glenn Blomquist's (1979) imagi- Broder (1990) found that industrial fatali-
native analysis of the decision to wear a ties such as airplane crashes and hotel
seat belt. The risk involved pertains to fires were valued by stockholders at $50
the reduced risk of fatality associated million per death. This high estimate re-
with the wearing of seat belts. Before flects private valuations of risk by con-
the advent of state mandatory seat belt sumers of the firm's products, the total
laws, only 17.2 percent of the population cost of tort awards, and possibly a low-
always used seat belts, 9.7 used the belt ered assessment of the overall quality of
most of the time, 26 percent used the the firm's operations as well.
belts sometimes, and 46.6 percent never
used seat belts.5" The major issue in this 6. Surveys and Contingent Valuations
analysis is the value attached to the time
Market-based evidence on risk
and inconvenience costs of wearing a seat
tradeoffs offers the considerable strength
belt, which are not directly observable.
that it is based on the actual risk-taking
The monetary component of the risk
decisions individuals make. Revealed
tradeoff analyzed by Blomquist (1979) is
preferences toward risk are a potentially
the value of time required to buckle a
seat belt, which he estimates at eight sec-
onds per use. Valued at the driver's wage 52
This approachis similarin spirit to the approach
used in highway speed-travel time tradeoffanalysis
of Ghosh, Lees, and Seal (1975).
51
These 1983 data are for persons five years old 5 Their analysisdoes not addressthe nonpecuniary
and over. See the U.S. Department of Commerce, costs of seat belts, however, and consequently is not
(1986), p. 604. conclusive.

useful basis for inferring the price that crease in the risk level may avoid these
individuals attach to improved safety. problems. Figure 3 illustrates a market
The above review of these estimates wage opportunities frontier ABC and the
identified a series of potential shortcom- worker's highest constant expected util-
ings. Chief among these are the follow- ity locus EU, which is tangent to the mar-
ing. First, the tradeoff values are perti- ket opportunities frontier. The most that
nent only in a local range.54 Analysis of can be achieved with a well designed la-
nonincremental risk changes or other bor market study is an evaluation of the
fundamental policy questions, such as local tradeoff at a point such as B. In
how the local tradeoff rate will change contrast, a survey that asks an individual
if the individual's base level of risk is al- what wage increase is needed to bear an
tered, cannot be addressed. Second, increase in risk level from qa to qb will
there remain substantial estimation is- provide information on two points B and
sues regarding the identification and D on a constant expected utility locus.
meaning of the risk premium estimates. The wage increment in this context will
The usual studies of a single risk-wage truly be a compensating differential that
tradeoff, for example, ignore the substan- maintains the individual's utility at a con-
tial heterogeneity across individuals in stant level. Moreover, the risk incre-
their attitudes toward risk. Third, there ments between qa and qb can be de-
is an important class of econometric prob- signed to analyze risk changes of any
lems pertaining to whether the re- magnitude.
searcher has in fact isolated the risk- Perhaps most important, information
money tradeoff. In the case of labor mar- pertaining to two or more points along
ket studies, there are other nonpecuniary a constant expected utility locus permits
aspects of the job correlated with riski- the estimation of the utility functions
ness that one must also take into account governing behavior. With knowledge of
to isolate the risk tradeoff. Many of the these utility functions, all pertinent ques-
product market studies encounter similar tions regarding risk valuation may be ad-
difficulties, with the added complication dressed, thereby greatly extending the
that it is often necessary to impute the range of issues that can be explored.
monetary component of the tradeoff. The character of the influence of health
Furthermore, all of these results are impacts on the utility function is an im-
premised on an assumption of individual portant matter of concern. If, for exam-
rationality. If individuals do not fully un- ple, adverse health effects lower the mar-
derstand the risk and respond to risks ginal utility of income in the ill health
in a rational manner, then the risk state, then less than full income replace-
tradeoff that people are actually making ment following these losses is optimal.
may not be those that researchers believe The entire structure of the optimal social
they are making based on objective mea- insurance efforts consequently hinges on
sures of the risk. Finally, market studies the character of utility functions.
of risk are limited to a narrow range of Viscusi and Evans' (1990) results men-
health outcomes. tioned earlier found that the typical job
Survey methods that elicit individual injury lowered both the absolute level
willingness to pay for greater safety or of utility and the marginal utility of in-
compensation required to bear an income. Moreover, the character of this
effect differed from what would have oc-
54It should be noted, however, that use of the curred if the job injury was tantamount
two-stage structuralhedonic approachwith market
data can address nonmarginalrisk changes as well. to a monetary loss equivalent (i.e., V(w)

= U(w - L), where L is some monetary be manipulated until indifference is

loss value equivalent of the injury). achieved.
In contrast, different kinds of results The third approach is to offer lotteries
are implied by using survey data on mi- and to elicit preferences with respect to
nor health effects, in particular, tempo- a reference lottery. For example, Vis-
rary poisonings and other injuries related cusi, Magat, and Huber (1991) analyze
to use of household chemical products. the value of chronic bronchitis by ascer-
For minor health effects, the hypothesis taining the equilibrating probability, s,
that these health outcomes are tanta- that establishes indifference between
mount to a monetary loss equivalent can- bronchitis and a lottery on life and death,
not be rejected (Evans and Viscusi 1991). where
In situations such as this where the U(Chronic Bronchitis) = sU(Life)
health outcome does not affect the mar-
ginal utility of income, full insurance of + (1 - s)V(Death).
losses is optimal. Moreover, assessment Choice of the particular survey method
of the valuations of different incremental depends in large part on which will elicit
changes in the risk of loss is straightfor- the most reliable statement of prefer-
ward once we know that the health out- ences, and thus far no consensus has de-
come is valued at some fixed monetary veloped.
amount. One of the main advantages of survey-
Three basic survey methodologies type approaches is that the analysis need
have been used to assess points such as not be constrained by the availability of
B and D in Figure 3. All of these involve market data. Consider, for example, the
eliciting responses to a simulated market range of health outcomes addressed in
context using variants of a procedure Tables 6 and 7. The value-of-life esti-
known as "contingent valuation," which mates in Table 6 are perhaps the most
ascertains individual preferences contin- homogeneous because they all pertain to
gent upon some hypothetical market different classes of accidental deaths or
scenario. acute outcomes such as heart attacks. The
The first such technique is a direct con- morbidity effects in Table 7 are much
tingent valuation method. A survey more diverse, ranging from coughing
might ask respondents directly how spells and hand burns to nerve disease
much of a wage increase they would re- and cancer. A principal benefit of survey
quire to accept a given risk increase. A methodologies is that they provide in-
variant on this approach is to proceed sight into classes of outcomes that cannot
in iterative fashion. Rather than seeking be addressed with available market data.
a response to an open-ended question, One such benefit category is altruistic
the willingness-to-pay value may be ad- benefits, which by their very nature will
justed until the respondent indicates in- not be reflected in market risk-takingde-
difference. cisions (see Viscusi, Magat, and Anne
A second technique involves present- Forrest 1988).
ing subjects with pairwise comparisons. A major concern with survey valua-
In the job risk case, for example, Job 1 tions of health risks is that the responses
might consist of a wage-risk combination will be reliable only to the extent that
of (pl,wl), and Job 2 might consist of a individuals understand the tasks to which
wage-risk package of (p2,W2). Subjects they are responding. A matter of particu-
could indicate their preference between lar concern is the processing of risk infor-
these two jobs, and the packages could mation presented in survey context.

TABLE 6
SUMMARY OF VALUE OF LIFE ESTIMATES BASED ON SURVEY EVIDENCE
Implicit
Average Value
Income of Life
Author (Year) Nature of Risk Survey Methodology Level ($ millions)
Jan Acton Improved ambulance Willingness to pay NA .1

(1973) service, post-heart question, door-to-
attack lives door small (36)
Boston Sample
Jones-Lee Airline safety and lo- Mail survey willing- NA 15.6
(1976) cational life expec- ness to accept in-
tanty risks creased risk, small
(30) U.K. sample,
1975
Gerking, deHaan, Job fatality risk Willingness to pay, NA 3.4 willingness
& Schulze willingness to ac- to pay, 8.8
(1988) cept change in job willingness
risk in mail survey, to accept
1984
Jones-Lee Motor vehicle acci- Willingness to pay for NA 3.8
(1989) dents risk reduction,
U.K. survey, 1982
Viscusi, Magat, Automobile accident Interactive computer 43,771 2.7 (median)
& Huber risks program with pair- 9.7 (mean)
(1991) wise auto risk-liv- (1987)
ing cost tradeoffs
until indifference
achieved, 1987
Ted Miller & Traffic safety Series of contingent NA 1.2
Jagadish Guria valuation ques-
(1991) tions, New Zea-
land Survey, 1989-
1990
Note: All values in December 1990 U.S. dollars.
Consider two different valuation stud- with a similar class of injuries but ad-
ies of the same health outcome using sur- dressed a much more comprehensible
veys involving different risk levels. The risk level-on the order of 15/10,000 an-
first of the studies reported in Table 7, nually. The value of the morbidity effects
by Viscusi, Magat, and Huber (1987), fo- such as skin poisonings and chloramine
cuses on individuals' valuations of the gassing is in a more reasonable range,
risks from bleach and drain opener, chlo- as the health effects assessed in this study
ramine gassings, child poisonings, and range in value from $700 to $3,500.
hand burns, among others. These mor- The discrepancy in the studies can be
bidity effects are by no means cata- traced to the difficulties posed by the
strophic, but the estimated values the small risks in the first study. Individuals
respondents attach to them are in excess who are willing to pay one dollar to
of $1 million in three cases. reduce the risk of bleach gassing by
Viscusi, Magat, and Huber (1987) dealt 1/1,000,000, will exhibit an implicit value

TABLE 7
SUMMARY OF VALUATIONS OF NONFATAL HEALTH RISKS
Average Value of
Income Health
Author (Year) Survey Methodology Level Nature of Risk Outcome
Mark Berger Contingent valuation NA Certain outcome of $98 (coughing spells),

et al. (1987) interviews with one day of various $35 (stuffed-up si-
119 respondents, illnesses nuses), $57 (throat
1984-1985 congestion), $63
(itching eyes), $183
(heavy drowsiness),
$140 (headaches), $62
(nausea)
Viscusi & Magat Paired comparison $39,768 Bleach: chloramine $1.78 million (bleach
(1987) and contingent val- gassings, child poi- gassing), $0.65 mil-
uation interactive sonings; drain lion (bleach poison-
computer survey opener: hand ing), $1.60 million
at mall, hardware burns, child poison- (drain opener hand
store, 1984 ings burns), $1.06 million
(drain opener & child
poisoning)
Viscusi, Magat, & Contingent valuation $42,700 Morbidity risks of pes- Insecticide $1,504 (skin
Huber (1987) computer survey ticide and toilet poisoning), $1,742
at mall, hardware bowl cleaner, valua- (inhalation), $3,489
stores, 1986 tions for 15/10,000 (child poisoning), toi-
risk decrease to let bowl cleaner
zero $1,113 (gassing), $744
(eye burn), $1,232
(child poisoning)
Viscusi, Magat, & Contingent valuation $44,554 Insecticide inhalation- Inhalation-skin poison-
Forrest (1988) computer survey skin poisoning, in- ing $2,538 (private),
at mall, hardware halation-child poi- $9,662 (NC altruism),
stores, 1986 soning $3,745 (U.S. al-
truism); Inhalation-
child poisoning
$4,709 (private),
$17,592 (NC al-
truism), $5,197 (U.S.
altruism)
Evans & Viscusi Contingent valuation $32,700 Morbidity risks of pes- Insecticide: $761 (T),
computer survey ticides and toilet $755 (L) (skin poison-
at mall, hardware bowl cleaner; utility ing); $1,047 (T),
stores, 1986 function estimates $1,036 (L)(inhalation-
of risk values. T no kids); $2,575 (T)
values pertain to (inhalation-children)
marginal risk-dollar $1,748; $3,207 (T),
tradeoffs, and L $2,877 (L) (child poi-
values pertain to soning); toilet bowl
monetary loss cleaner $633 (T), $628
equivalents. (L) eye burn; $598
(T), $593 (L) gassing
(no kids); $717 (T),
$709 (L) gassing (chil-
dren); $1,146 (T),
$1,126 (L) child poi-
soning

TABLE 7 (Continued)
Average Value of
Income Health
Author (Year) Survey Methodology Level Nature of Risk Outcome
Magat, Viscusi, & Risk-risk computer $35,700 Environmental risk of $1.6 million (nerve dis-
Huber (1991) survey at mall, nonfatal nerve disease), $2.6 million
1990 ease, fatal lym- (nonfatal lymphoma),
phoma, nonfatal $4.1 million (fatal
lymphoma lymphoma)
Viscusi, Magat, & Risk-risk and risk- $41,000 Environmental risk of .32 fatality risk or
Huber (1991) dollar computer severe chronic $904,000 risk-risk;
survey at mall, bronchitis morbid- $516,000 risk-dollar
1988 ity risk
Alan Krupnick & Viscusi-Magat-Hu- $39,744 Environmental risk of $496,800-$691,200
Maureen Crop- ber (1991) survey severe chronic (median)
per (1992) for sample with bronchitis morbid-
chronic lung dis- ity risk
ease, 1989
for the injury of $1 million, but this re- can also be addressed by using a survey
sponse may not reflect the underlying mechanism that is designed to elicit a
risk-dollartradeoff so much as it does the truthful expression of preferences, such
inability of individuals to deal with ex- as hypothetical voting on a political refer-
tremely low probability events. As the endum.
risk levels in Table 1 indicate, the usual
7. Policy Implications
range of experience with risk is with haz-
ards of much greater frequency. The evi- Although the value-of-life literature is
dence in the psychology and economics now roughly two decades old, the essen-
literature sketched in Figure 2 indicates tial approach became well established in
there is a tendency to overestimate the the 1970s. The appropriate measure of
magnitude of very low probability the value of life from the standpoint of
events, particularly those called to one's government policy is society's willing-
attention. Survey methodologies may ness to pay for the risk reduction, which
elicit individual valuations as perceived is the same benefit formulation in all pol-
by the respondent, but one must ensure icy evaluation contexts.
that what is being perceived is accurate. Economists have had the greatest suc-
Errors in risk perceptions may be a par- cess in assessing the risk-money tradeoff
ticularly salient difficulty. using labor market data. Although the
A final concern with respect to survey tradeoff estimates vary considerably de-
valuations is whether the respondents pending on the population exposed to the
are giving honest and thoughtful answers risk, the nature of the risk, individuals'
to the survey questions. In practice, income level, and similar factors, most
truthful revelation of preferences has of the reasonable estimates of the value
proven to be less of a problem than has of life are clustered in the $3 million-$7
the elicitation of meaningful responses million range. Moreover, these estimates
because of a failure to understand the are for the population of exposed work-
survey task. Strategic misrepresentation ers, who generally have lower incomes

than the individuals being protected by tions has been in excess of $100 million
broadly based risk regulations. Recogni- (see Viscusi 1992a). It is in addressing
tion of the positive elasticity of the value the most extreme policy errors that the
of life with respect to worker earnings estimates will be most useful, as opposed
will lead to the use of different values to pinpointing the value of life that
of life depending on the population being should guide policy decisions.
protected. Taste differences may also en- A needed major change is to establish
ter, as smokers and workers in very haz- an appropriate schedule of values of life
ardous jobs, for example, place lower that is pertinent for the differing popula-
values on health risks. tions at risk. The quantity of life at risk
The 1980s marked the first decade in often varies quite widely, as do individual
which use of estimates of the value of attitudes toward these risks. Policies that
life based on risk tradeoffs became wide- protect groups who incur risks volun-
spread throughout the Federal govern- tarily should be treated quite differently
ment. Previously, agencies assessed only from policies that protect populations
the lost present value of the earnings of who bear risks involuntarily or who have
the deceased, leading to dramatic under- a very high aversion to incurring health
estimation of the benefit value. In large risks. Differences also arise on a temporal
part through the efforts of the U. S. Office dimension. Valuation of health risks to
of Management and Budget, agencies future generations is assuming greater
such as OSHA and EPA began incorpo- policy importance, but these values will
rating value-of-life estimates in their ben- not be the same as for those currently
efit evaluations.55 Policy makers' recogni- alive.
tion of the nonpecuniary aspects of life Broad gaps in our knowledge remain,
is an important advance. particularly with regard to risks other
Given the range of uncertainty of the than accidental fatalities. How, for exam-
value-of-life estimates, perhaps the most ple, should we value genetic risks and
reasonable use of these values in policy increased life extension for AIDS vic-
contexts is to provide a broad index of tims, as compared with other health out-
the overall desirability of a policy. In comes? The class of health outcomes of
practice, value-of-life debates seldom fo- policy interest is much broader than
cus on whether the appropriate value of acute fatal injuries and lost workday acci-
life should be $3 million or $4 million- dents, which have been the main targets
narrow differences that cannot be distin- of analysis. Survey evidence on attitudes
guished based on the accuracy of current toward risk can potentially expand the
estimates and the potential limitations of range of health outcomes that we can
individual behavior underlying these es- value, but there is a continuing need to
timates. However, the estimates do pro- assess the validity of these benefit mea-
vide guidance as to whether risk reduc- sures.
tion efforts that cost $50,000 per life
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The Value of Risks to Life and Health

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The Value of Risks

SusanJakubiakand three anonymousreferees provided detailed and

1. Introduction yond our control have merited compara-

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7Risk neutrality (U", V' = 0) always leads to the

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General Specification Issues proaches involving the use of structural

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job classification. workersrequire to accept risks,whereaspolicy evalu-

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Viscusi (1979), with evidence of a signifi- A more elaborate alternative is to de-

geneity can be ascertainedthroughinteractionterms. G = U(w(py))(1 - pij) , [1(1 - PY)Y_1

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of w. In the case of fatality risks, V(y) Income EU

represents the worker's bequest func- D c A

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utility locus, as in Evans and Viscusi lems. Potentially substantial measure-

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pecuniary characteristic variables, and gathered by government agencies that

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'Cd 'd 0 a) 0 C) Cd $..cn

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Component of Implicit Value

Debapriya Ghosh, Highway speed- Value of driver NA .07

Note: All values in December 1990 dollars.

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= U(w - L), where L is some monetary be manipulated until indifference is

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Jan Acton Improved ambulance Willingness to pay NA .1

Note: All values in December 1990 U.S. dollars.

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Mark Berger Contingent valuation NA Certain outcome of $98 (coughing spells),

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This content downloaded from 200.89.140.130 on Sat, 4 May 2013 14:05:08 PM

This content downloaded from 200.89.140.130 on Sat, 4 May 2013 14:05:08 PM

This content downloaded from 200.89.140.130 on Sat, 4 May 2013 14:05:08 PM

This content downloaded from 200.89.140.130 on Sat, 4 May 2013 14:05:08 PM

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