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The Dead-Anyway Effect Revis(it)ed

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  • Friedrich Breyer
  • Stefan Felder

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 capital, 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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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.38652.de/dp302.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 302.

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Length: 12 p.
Date of creation: 2002
Date of revision:
Handle: RePEc:diw:diwwpp:dp302

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Keywords: Value of life; expected utility; willingness to pay; insurance markets;

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  1. Felder, Stefan & Meier, Markus & Schmitt, Horst, 2000. "Health care expenditure in the last months of life," Journal of Health Economics, Elsevier, Elsevier, vol. 19(5), pages 679-695, September.
  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.
  3. Rosen, Sherwin, 1988. " The Value of Changes in Life Expectancy," Journal of Risk and Uncertainty, Springer, Springer, vol. 1(3), pages 285-304, September.
  4. 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.
  5. 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, University of Chicago Press, vol. 95(1), pages 89-114, February.
  6. Hammitt, James K & Graham, John D, 1999. "Willingness to Pay for Health Protection: Inadequate Sensitivity to Probability?," Journal of Risk and Uncertainty, Springer, Springer, vol. 18(1), pages 33-62, April.
  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, University of Chicago Press, vol. 104(4), pages 747-63, August.
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Cited by:
  1. Strand, Jon, 2006. "Valuation of environmental improvements in continuous time with mortality and morbidity effects," Resource and Energy Economics, Elsevier, Elsevier, vol. 28(3), pages 229-241, August.

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