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Complementarity and the Measurement of Individual Risk Tradeoffs: Accounting for Quantity and Quality of Life Effects

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  • Mary F. Evans
  • V. Kerry Smith

Abstract

This paper considers the factors responsible for differences with age in estimates of the wage compensation an individual requires to accept increased occupational fatality risk. We derive a relationship between the value of a statistical life (VSL) and the degree of complementarity between consumption and labor supplied when health status serves as a potential source of variation in this relationship. Our empirical analysis finds that variations in an individual's health status or quality of life and anticipated longevity threats lead to significant differences in the estimated wage/risk tradeoffs. We describe how extensions to the specification of hedonic wage models, including measures for quality of life and anticipated longevity threats, help to explain the diversity in past studies examining how the estimated wage–risk tradeoff changes with age.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13722.

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Date of creation: Jan 2008
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Publication status: published as Mary Evans & V. Kerry Smith, 2008. "Complementarity and the Measurement of Individual Risk Tradeoffs: Accounting for Quantity and Quality of Life Effects," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 41(3), pages 381-400, November.
Handle: RePEc:nbr:nberwo:13722

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  1. Robert E. Hall & Charles I. Jones, 2004. "The Value of Life and the Rise in Health Spending," NBER Working Papers 10737, National Bureau of Economic Research, Inc.
  2. François Bourguignon & Martin Fournier & Marc Gurgand, 2004. "Selection Bias Corrections Based on the Multinomial Logit Model: Monte-Carlo Comparisons," DELTA Working Papers 2004-20, DELTA (Ecole normale supérieure).
  3. Viscusi, W. Kip & Aldy, Joseph, 2006. "Labor Market Estimates of the Senior Discount for the Value of Statistical Life," Discussion Papers dp-06-12, Resources For the Future.
  4. 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.
  5. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
  6. Smith, V. Kerry & Pattanayak, Subhrendu K. & Van Houtven, George L., 2003. "VSL reconsidered: what do labor supply estimates reveal about risk preferences?," Economics Letters, Elsevier, vol. 80(2), pages 147-153, August.
  7. Louis Kaplow, 2005. "The Value of a Statistical Life and the Coefficient of Relative Risk Aversion," Journal of Risk and Uncertainty, Springer, vol. 31(1), pages 23-34, July.
  8. Alan Krupnick, 2007. "Mortality-risk Valuation and Age: Stated Preference Evidence," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 1(2), pages 261-282, Summer.
  9. Ivar Ekeland & James Heckman & Lars Nesheim, 2002. "Identifying hedonic models," CeMMAP working papers CWP06/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  10. Eeckhoudt, Louis R & Hammitt, James K, 2001. " Background Risks and the Value of a Statistical Life," Journal of Risk and Uncertainty, Springer, vol. 23(3), pages 261-79, November.
  11. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  12. G. Burtless & J. A. Hausman, 1977. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiment," Working papers 211, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Evans, Mary F. & Smith, V. Kerry, 2006. "Do we really understand the age-VSL relationship?," Resource and Energy Economics, Elsevier, vol. 28(3), pages 242-261, August.
  14. Joseph E. Aldy & W. Kip Viscusi, 2007. "Age Differences in the Value of Statistical Life: Revealed Preference Evidence," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 1(2), pages 241-260, Summer.
  15. Aldy, Joseph E. & Viscusi, W. Kip, 2006. "Adjusting the Value of a Statistical Life for Age and Cohort Effects," Discussion Papers dp-06-19, Resources For the Future.
  16. EECKHOUDT, Louis & HAMMITT, James, . "Does risk aversion increase the value of mortality risk?," CORE Discussion Papers RP -1698, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  17. Smith, V. Kerry & Taylor, Donald H., Jr. & Sloan, Frank A., 2000. "Longevity Expectations and Death: Can People Predict Their Own Demise?," Working Papers 00-15, Duke University, Department of Economics.
  18. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
  19. François Bourguignon & Martin Fournier & Marc Gurgand, 2002. "Selection Bias Correction Based on the Multinomial Logit Model," Working Papers 2002-04, Centre de Recherche en Economie et Statistique.
  20. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, vol. 96(5), pages 1821-1834, December.
  21. Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-47, June.
  22. Joseph E. Aldy & W. Kip Viscusi, 2004. "Age Variations in Workers' Value of Statistical Life," NBER Working Papers 10199, National Bureau of Economic Research, Inc.
  23. Sunstein, Cass R., 2004. "Are Poor People Worth Less Than Rich People? Disaggregating the Value of Statistical Lives," Working paper 193, Regulation2point0.
  24. V. Kerry Smith & Mary F. Evans & Hyun Kim & Donald H. Taylor, 2004. "Do the Near-Elderly Value Mortality Risks Differently?," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 423-429, February.
  25. Jason F. Shogren & Tommy Stamland, 2002. "Skill and the Value of Life," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1168-1197, October.
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Cited by:
  1. Maureen Cropper & James K. Hammitt & Lisa A. Robinson, 2011. "Valuing Mortality Risk Reductions: Progress and Challenges," Annual Review of Resource Economics, Annual Reviews, vol. 3(1), pages 313-336, October.
  2. Jonathan M. Lee & Laura O. Taylor, 2014. "Randomized Safety Inspections And Risk Exposure On The Job: Quasi-Experimental Estimates Of The Value Of A Statistical Life," Working Papers 14-05, Center for Economic Studies, U.S. Census Bureau.
  3. Stephen C. Newbold, 2011. "Valuing Health Risk Changes Using a Life-Cycle Consumption Framework," NCEE Working Paper Series 201103, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Apr 2011.
  4. Mary F. Evans & V. Kerry Smith, 2009. "Measuring How Risk Tradeoffs Adjust With Income," NBER Working Papers 15372, National Bureau of Economic Research, Inc.

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