The Heterogeneity of the Value of Statistical Life

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The Heterogeneity of the Value of Statistical Life

• W. Kip Viscusi
• University Distinguished Professor
• Vanderbilt University
• kip.viscusi_at_vanderbilt.edu
• American Society of Health Economists
• June 20, 2010

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Value of Statistical Life (VSL)

• Academic Literature
• Definition
• Labor market studies
• Variation with risk levels
• Segmented labor markets
• Age
• Income .

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VSL Outline Contd

• Policy Arena
• Adoption of the VSL methodology
• Age controversy
• Income controversies
• The Future of VSL .

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Calculating the Value of Statistical Life

• Suppose 1/10,000 risk to 10,000 people so 1
  expected death
• Assume each would pay 800 to eliminate the risk
• VSL 10,000 people 800/person 8,000,000
• .

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Dominant Approach Wage-Risk Tradeoffs

• Adam Smiths theory of compensating wage
  differentials
• Controlling for other aspects of the job, how
  much pay for extra risk?
• Hedonic wage model as workers pick optimal (risk,
  wage) combination from market offer curve.
  .

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The Average Value of Statistical Life

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

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Heterogeneity Based on Risk Level

• Workers who choose higher risk levels are on
  flatter part of market offer curve.

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Heterogeneity Based on Risk Level, contd

• Early studies found workers with fatality risk of
  1/10,000 (Viscusi 1978, 1979) had VSL 5 times
  greater than study of workers facing risk of
  1/1,000
• (Thaler and Rosen 1975).
• Differences arise from legitimate heterogeneity
  in VSL tradeoffs not failure of economists to
  find the value of life number. .

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Segmented Labor Markets

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

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Workers facing different offer curves settle into
separate equilibria.
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Examples of Separate Labor Market Offer Curves

• Smokers and Nonsmokers
• (Viscusi and Hersch 2001)
• Black-white VSL differences
• (Viscusi 2003)
• Mexican immigrants versus other immigrants or
  native Americans
• (Hersch and Viscusi 2010) .

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VSL and Immigrant Status
Fatality Risk VSL
Estimates Bases on the CPS
Native U.S. 4.35 7.95
Mexican immigrants 5.97 Not significant
Estimates Based on the NIS
All immigrants 4.50 9.35
Mexican immigrants 5.70 Not significant
Mexican immigrants who speak English 5.70 3.44
Fatality rate by industry-immigrant status-age.
Risk is annual fatality rate per 100,000
workers.
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Heterogeneity Based on Age

• VSL will vary with age because length of
  remaining life varies
• Imperfect capital markets
• Life-cycle effects .

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Age and the Labor Market

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

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Cohort-Adjusted and Cross-Section Value of
Statistical Life, 1993-2000
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What Do We Know About Age-VSL?

• VSL does not peak at birth
• VSL does not plummet as we age
• VSL for workers around age 60 is higher than for
  workers age 20 .

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Value per Year of Life (VSLY)

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

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Value of a Statistical Life-Year Based on
Cohort-Adjusted and Cross-Section Value of
Statistical Life, 1993-2000
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Applications of VSL and VSLY to Private Costs of
Cigarettes

• Viscusi and Hersch (2008) estimate VSL and VSLY
  specific to smoking status
• Calculate the private mortality costs per pack of
  cigarettes
• At 3 interest rate, cost per pack is on order of
  200 for men and 100 for women
• At smokers estimated labor market discount for
  years of life of 14 (Scharff and Viscusi, 2010),
  cost per pack drops to 24 for men and 6 for
  women .

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Income Effects

• Proportional for present value of lost earnings
• Willingness to pay increases with income
• Estimation strategies meta analyses across
  studies and quantile regression estimates within
  sample .

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Income Elasticity Estimates

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

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VSL in the Policy Arena

• Adoption of the VSL approach
• Age variations
• Income variations
• Other controversies .

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Valuing Lives for Policy

• 1982 hazard communication debate
• Life is too sacred to value so OSHA calculated
  cost of death as present value of lost earnings
• OMB Benefits did not exceed costs so rejected
  regulatory proposal
• OSHA appealed to V-P Bush
• I analyzed merits of proposal using proper value
  of statistical life (VSL) estimates 10
  times the present value of lost earnings .

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Using VSL Saves Lives

• My 1982 estimates were just over
• 3 million
• Benefits now exceeded costs, and regulation was
  issued
• Historical context is that VSL was more
  supportive of risk regulation than making lives
  priceless
• VSL now under attack for pricing lives .

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The Senior Discount Controversy

• EPA used a senior discount of 37 in analysis of
  Clear Skies initiative in 2002.
• Political firestorm
• Seniors on sale
• 37 off
• EPA backed off approach. Proposed Senate
  legislation banning all demographic
  adjustments. .

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International Senior Discounts

• Canada used a VSL 25 lower for those over 65
  compared to those under 65.
• In 2001, European Commission recommended VSL that
  declines with age. .

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Does Fairness Provide Any Insight?

• Is same value per statistical life equitable?
• versus
• Is same value per statistical life year
  equitable?
• Return to first principleswillingness to pay
  .

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Should Income Levels Matter?

• VSL increases with income
• Provide policies poor dont value?
• Airline safety should we regulate it more
  stringently than highway safety?
• Planes versus guardrails
• DOT adopted Viscusi-Aldy (2003) elasticity
  estimate of 0.55.
• Rationale is stronger if beneficiaries of safety
  regulation pay for higher costs of safety. .

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Income at Point of Time or Over Time

• DOTs proposed adjustment is very bold policy
  initiative to account for within population
  differences.
• Income changes over time for future generations
  receive greater support.
• Efficient, but redistributes income from poorer
  current generation to richer future
  generation. .

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Income at Point of Time or Over Time, contd

• Reference dependence effect. Proposed Senate
  legislation in 2008 to require income adjustment
  for VSL and require that only increases in VSL be
  permitted. .

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The 2008 Devaluation of Life Controversy

• Based on conflicting results of 2 meta analyses
  (Viscusi and Aldy vs.
• Mrozek and Taylor), in 2008.
• EPA Air Office lowered the VSL from
• 8 million to 7 million
• Economic puzzle since income levels have risen.
  Why did studies differ?
• Political firestorm Bush conspiracy? .

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The 2008 Devaluation of Life Controversy, contd

• Proposed Senate legislation in Fall 2008
  requiring that agencies must only raise VSL over
  time.
• But EPA Air Office number still relatively high.
  .

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Other Sources of Variation in Valuing Life

• How people die matters
• Victims of terrorism versus natural disasters
  differ by factor of 2 in societys valuation of
  reducing their risks (Viscusi 2009)
• Irresponsible behavior by people who put
  themselves at risk reduces their societal values,
  e.g., railway trespassers and suicides (Covey,
  Robinson, Jones-Lee, and Loomes 2010). .

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Conclusion

• VSL has been an integral part of benefits
  assessment for a quarter century
• Misunderstanding of the economic value of life
  may stimulate much of the continued controversy
• Opposition to VSL is often misguided
• Improved fatality rate data and survey data have
  greatly expanded questions that researchers can
  address .

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Conclusion, contd

• Estimates of heterogeneity and sources of
  heterogeneity are becoming more refined
• More refined VSL estimates present new policy
  challenges
• Treating some risk reductions as priceless may
  make them worthless .

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Selected References

• Aldy, Joseph E., and W. Kip Viscusi. 2007. Age
  Differences in the Value of Statistical Life
  Revealed Preference Evidence. Review of
  Environmental Economics and Policy, 1(2)
  241-260.  
• Aldy, Joseph E., and W. Kip Viscusi. 2008.
  Adjusting the Value of a Statistical Life for
  Age and Cohort Effects. Review of Economics and
  Statistics, 90(3) 573-581.
• Hersch, Joni, and W. Kip Viscusi. 2010.
  Immigrant Status and the Value of Statistical
  Life. Journal of Human Resources.
• Kniesner, Thomas J., W. Kip Viscusi, and James P.
  Ziliak. 2010. Policy Relevant Heterogeneity in
  the Value of Statistical Life New Evidence from
  Panel Data Quantile Regressions.Journal of Risk
  and Uncertainty, 40(1) 15-31.
• Scharff, Robert L., and W. Kip Viscusi. 2010.
  Heterogeneous Rates of Time Preference and the
  Decision to Smoke. Economic Inquiry.
• Viscusi, W. Kip. 1979. Employment Hazards An
  Investigation of Market Performance, Harvard
  Economic Studies No. 148. Cambridge Harvard
  University Press.

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Selected References, contd

• Viscusi, W. Kip. 2003. Racial Differences in
  Labor Market Values of a Statistical Life.
  Journal of Risk and Uncertainty, 27(3) 239-256.
• Viscusi, W. Kip. 2009. The Devaluation of Life.
  Regulation and Governance, 3(2) 103-127.
• Viscusi, W. Kip. 2009. Valuing Risks of Death
  from Terrorism and Natural Disasters. Journal of
  Risk and Uncertainty, 38(3) 191-213.
• Viscusi, W. Kip, and Joseph E. Aldy. 2003. The
  Value of a Statistical Life A Critical Review of
  Market Estimates throughout the World. Journal
  of Risk and Uncertainty, 27(1) 5-76.
• Viscusi, W. Kip, and Joseph E. Aldy. 2007. Labor
  Market Estimates of the Senior Discount for the
  Value of Statistical Life. Journal of
  Environmental Economics and Management, 53(3)
  377-392.
• Viscusi, W. Kip, and Joni Hersch. 2001.
  Cigarette Smokers as Job Risk Takers. Review
  of Economics and Statistics, 83(2) 269-280.
• Viscusi, W. Kip, and Joni Hersch. 2008. The
  Mortality Cost to Smokers. Journal of Health
  Economics, 27(4) 943-958.