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The Dead-anyway Effect Revis(it)ed

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Author Info
Breyer, Friedrich
Felder, Stefan

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Abstract

In the expected-utility theory of the monetary value of a statistical life, the so-called "dead-anyway" effect discovered by Pratt and Zeckhauser (1996) asserts that an individuals' willingness to pay (WTP) for small reductions in mortality risk increases with the initial level of risk. Their reasoning is based on differences in the marginal utility of wealth between the two states of nature: life and death. However, this explanation is based on the absence of markets for contingent claims, i.e. annuities and life insurance. This paper reexamines the "dead-anyway" effect and establishes two main results: first, for a risk-averse individual without a bequest motive, marginal WTP for survival does increase with the level of risk but when insurance markets are perfect, this occurs for a different reason than given by Pratt and Zeckhauser. Secondly, when the individual has a bequest motive and is endowed with a sufficient amount of non-inheritable wealth, the effect of initial risk on WTP for survival is reversed: the higher initial risk the lower the value of a statistical life.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 805.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_805

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Related research
Keywords: value of life; expected utility; willingness to pay; insurance markets;

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Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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  1. Rosen, Sherwin, 1988. " The Value of Changes in Life Expectancy," Journal of Risk and Uncertainty, Springer, vol. 1(3), pages 285-304, September.
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  2. Friedrich Breyer & Markus M. Grabka, 2001. "Is There a "Dead-Anyway" Effect in Willingness to Pay for Risk Reduction?," Discussion Papers of DIW Berlin 252, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  3. Hammitt, James K & Graham, John D, 1999. "Willingness to Pay for Health Protection: Inadequate Sensitivity to Probability?," Journal of Risk and Uncertainty, Springer, vol. 18(1), pages 33-62, April. [Downloadable!] (restricted)
  4. Smith, V Kerry & Desvousges, William H, 1987. "An Empirical Analysis of the Economic Value of Risk Changes," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 89-114, February. [Downloadable!] (restricted)
  5. Felder, Stefan & Meier, Markus & Schmitt, Horst, 2000. "Health care expenditure in the last months of life," Journal of Health Economics, Elsevier, vol. 19(5), pages 679-695, September. [Downloadable!] (restricted)
  6. Viscusi, W Kip, 1993. "The Value of Risks to Life and Health," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1912-46, December. [Downloadable!] (restricted)
  7. Pratt, John W & Zeckhauser, Richard J, 1996. "Willingness to Pay and the Distribution of Risk and Wealth," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 747-63, August. [Downloadable!] (restricted)
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