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The impact of real options on willingness to pay for mortality risk reductions

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  • Krüger, Niclas A.
  • Svensson, Mikael

Abstract

Public investments are dynamic in nature, and decision making must account for the uncertainty, irreversibility and potential for future learning. In this paper we adapt the theory for investment under uncertainty for a public referendum setting and perform the first empirical test to show that estimates of the value of a statistical life (VSL) from stated preference surveys are highly dependent on the inclusion of the option value. Our results indicate an option value of a major economic magnitude. This implies that previously reported VSL estimates, used in societal benefit-cost analysis of health investments, are exaggerated.

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Article provided by Elsevier in its journal Journal of Health Economics.

Volume (Year): 28 (2009)
Issue (Month): 3 (May)
Pages: 563-569

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Handle: RePEc:eee:jhecon:v:28:y:2009:i:3:p:563-569
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505560

Keywords: Value of a statistical life Benefit-cost analysis Real options Contingent Valuation Road safety;

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  1. Glenn Harrison, 2006. "Experimental Evidence on Alternative Environmental Valuation Methods," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 34(1), pages 125-162, 05.
  2. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
  3. Dinky Daruvala, 2007. "Gender, risk and stereotypes," Journal of Risk and Uncertainty, Springer, vol. 35(3), pages 265-283, December.
  4. W. Kip Viscusi & Joseph E. Aldy, 2003. "The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," NBER Working Papers 9487, National Bureau of Economic Research, Inc.
  5. Hanemann, W. Michael, 1989. "Information and the concept of option value," Journal of Environmental Economics and Management, Elsevier, vol. 16(1), pages 23-37, January.
  6. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
  7. Svensson, Mikael, 2006. "The Value of a Statistical Life in Sweden Estimates from Two Studies using the "Certainty Approach" Calibration," Working Papers 2006:6, Örebro University, School of Business, revised 25 Jul 2007.
  8. Andersson, Henrik & Svensson, Mikael, 2006. "Cognitive Ability and Scale Bias in the Contingent Valuation Method," Working Papers 2006:2, Swedish National Road & Transport Research Institute (VTI).
  9. Jinhua Zhao & Catherine L. Kling, 2004. "Willingness to Pay, Compensating Variation, and the Cost of Commitment," Economic Inquiry, Western Economic Association International, vol. 42(3), pages 503-517, July.
  10. Johannesson, Magnus & Johansson, Per-Olov & Lofgren, Karl-Gustaf, 1997. "On the Value of Changes in Life Expectancy: Blips versus Parametric Changes," Journal of Risk and Uncertainty, Springer, vol. 15(3), pages 221-39, December.
  11. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  12. James Murphy & P. Allen & Thomas Stevens & Darryl Weatherhead, 2005. "A Meta-analysis of Hypothetical Bias in Stated Preference Valuation," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 30(3), pages 313-325, 03.
  13. Zhao, Jinhua & Kling, Catherine L., 2009. "Welfare Measures When Agents Can Learn: A Unifying Theory," Staff General Research Papers 13010, Iowa State University, Department of Economics.
  14. Mensink, Paul & Requate, Till, 2005. "The Dixit-Pindyck and the Arrow-Fisher-Hanemann-Henry option values are not equivalent: a note on Fisher (2000)," Resource and Energy Economics, Elsevier, vol. 27(1), pages 83-88, January.
  15. repec:reg:rpubli:282 is not listed on IDEAS
  16. Zhao, Jinhua & Kling, Catherine L., 2001. "A new explanation for the WTP/WTA disparity," Economics Letters, Elsevier, vol. 73(3), pages 293-300, December.
  17. Fisher, Anthony C., 2000. "Investment under uncertainty and option value in environmental economics," Resource and Energy Economics, Elsevier, vol. 22(3), pages 197-204, July.
  18. Jay Corrigan & Catherine Kling & Jinhua Zhao, 2008. "Willingness to Pay and the Cost of Commitment: An Empirical Specification and Test," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 40(2), pages 285-298, June.
  19. Kling, Catherine L. & Zhao, Jinhua, 2001. "New Explanation for the Wtp/Wta Disparity (A)," Staff General Research Papers 5113, Iowa State University, Department of Economics.
  20. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
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Cited by:

  1. Sund, Björn, 2009. "Certainty calibration in contingent valuation - exploring the within-difference between dichotomous choice and open-ended answers as a certainty measure," Working Papers 2009:1, Örebro University, School of Business.
  2. Hultkrantz, Lars & Svensson, Mikael, 2012. "The value of a statistical life in Sweden: A review of the empirical literature," Health Policy, Elsevier, vol. 108(2), pages 302-310.
  3. Hultkrantz, Lars & Svensson, Mikael, 2010. "The Economic Value of Preventing Fatalities: Recent evidence on the value of a statistical life in Sweden," Working Papers 2010:14, Örebro University, School of Business.
  4. Lawrence, Craig & Thomas, Mathew, 2008. "Real Options: Applications in Public Economics," MPRA Paper 11915, University Library of Munich, Germany.

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