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Finite Life Expectancy And The Age-Dependent Value Of A Statistical Life

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Author Info
Guang-Zhen Sun
Yew-Kwang Ng

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Abstract

In this short paper, we investigate the behavior of the age-dependent value of a statistical life (VSL) within a lifecycle framework with a finite maximal possible lifespan. Some existing results, obtained under the unrealistic assumption of an infinite life expectancy, are reversed. In particular, we show that when the market interest rate is equal to (or less than) the sum of age-specific mortality rate and the discounting rate in time preference at any age over the remaining lifetime, then VSL declines. We also show that an inverted-U shape of VSL profile over the life cycle emerges under realistically plausible circumstances. An innovation is that we characterize the changes in optimal consumption and instantaneous utility with age, showing that such changes are proportionate to the difference between the sum of age-specific mortality rate and the discounting rate in time preference and the market interest rate, which may prove to be useful in addressing other issues related to VSL.

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File URL: http://www.buseco.monash.edu.au/eco/research/papers/2008/1208finitelifesunng.pdf
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Publisher Info
Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 12/08.

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Length: 16 pages
Date of creation: 03 May 2008
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Handle: RePEc:mos:moswps:2008-12

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Postal: Department of Economics, Monash University, Victoria 3800, Australia
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Related research
Keywords: Value of life; life expectancy; interest rates; time preference; mortality.;

Find related papers by JEL classification:
J17 - Labor and Demographic Economics - - Demographic Economics - - - Value of Life; Foregone Income
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Arthur, W B, 1981. "The Economics of Risks to Life," American Economic Review, American Economic Association, vol. 71(1), pages 54-64, March. [Downloadable!] (restricted)
  2. 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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  3. Yew-Kwang Ng, 1992. "The older the more valuable: Divergence between utility and dollar values of life as one ages," Journal of Economics, Springer, vol. 55(1), pages 1-16, February. [Downloadable!] (restricted)
  4. Isaac Ehrlich & Yong Yin, 2005. "Explaining Diversities in Age-Specific Life Expectancies and Values of Life Saving: A Numerical Analysis," Journal of Risk and Uncertainty, Springer, vol. 31(2), pages 129-162, September. [Downloadable!] (restricted)
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