The Value of Safety as Revealed in the Swedish Car Market: An Application of the Hedonic Pricing Approach

In this article the hedonic regression technique is used to estimate the value of traffic safety, using information from the Swedish market for automobiles. The results from the study show that the market price of an automobile is negatively correlated with its inherent risk level, i.e. Swedish car consumers pay a safety premium for safer cars. In comparison to previous Swedish stated-preference studies, this study reveals a lower willingness to pay for additional car safety, which might be a result of the interaction between government interventions and individual self-insurance and self-protection.JEL Classification: C51, D61, J28     

Probabilistic Insurance

Probabilistic insurance is an insurance policy involving a small probability that the consumer will not be reimbursed. Survey data suggest that people dislike probabilistic insurance and demand more than a 20% reduction in the premium to compensate for a 1% default risk. While these preferences are intuitively appealing they are difficult to reconcile with expected utility theory. Under highly plausible assumptions about the utility function, willingness to pay for probabilistic insurance should be very close to willingness to pay for standard insurance less the default risk. However, the reluctance to buy probabilistic insurance is predicted by the weighting function of prospect theory. This finding highlights the potential role of the weighting function to explain insurance.     

Imprecise preferences and the WTP-WTA disparity

This article reports the results of a study designed to elicit willingness to pay (WTP) and willingness to accept (WTA) values for changes in the risk of nonfatal road injuries. We examine the possibility that individuals' preferences over combinations of wealth, risk, and safety are imprecise, and that this imprecision might result in the observed disparity between WTP and WTA measures of value. The results confirm that individuals' preferences for safety are significantly imprecise, but that this alone is insufficient to explain more than part of the disparity. Indeed, respondents' estimates of the minimum that they would be prepared to accept for a risk increase frequently exceed the maximum that they would be prepared to pay for an equivalent risk reduction.     

Self Selection Bias in the Estimates of Compensating Differentials for Job Risks in India

This study contributes to the hedonic wage literature in developing countries by estimating the collective willingness to pay of a statistical life/injury, using an original data set from the Indian labor market. As self-selection by workers results in biased estimates of the wage premium for job risks, the study uses a modified selectivity bias correction technique. Empirical results indicate substantial heterogeneity in returns to risk. The estimated value of life without selectivity bias is Rs. 56 million (US $3 million), which is substantially larger than the value with selection bias. The estimates provided by the study can aid policy makers, international agencies and other researchers in evaluating health projects in India and other developing countries.     

Average willingness to pay for disease prevention with personalized health information

Personal health related information modifies individuals’ willingness to pay for disease prevention programs inasmuch as it allows health status assessment based on intrinsic (instead of average) characteristics. In this paper, we examine the effect that personalized information about the baseline probability of disease has on the average willingness to pay for programs reducing either the probability of disease (self-protection) or the severity of disease (self-insurance). We show that such information raises the average willingness to pay for self-protection while it increases the average willingness to pay for self-insurance if health and wealth are complements (i.e. the marginal utility of wealth rises with health).     

Compensating wage differentials for workplace accidents: Evidence for union and nonunion workers in the UK

This article measures compensating wage differentials for job risks for union and nonunion workers. Job risk is made endogenous to avoid a selectivity bias arising if more able people choose safer jobs. We find that this adjustment has a considerable effect on the union group, raising their fatal risk premium above that of non union workers. This implies that there is more variation in unmeasured ability in the unionized group, and that job risk is an inferior good. The fact that unionized workers are also found in safer jobs might therefore be attributable to their greater wealth, rather than to greater“knowledge” in the unionized plant. The estimated statistical value of a life is £8.8 million in 1990 prices for union workers, with nonunion workers about 20% lower.     

A strong (Ross) characterization of multivariate risk aversion

Using the addition of uncorrelated noise as a natural definition of increasing risk for multivariate lotteries, I interpret risk aversion as the willingness to pay a (possibly random) vector premium in exchange for a reduction in multivariate risk. If no restriction is placed on the sign of any co-ordinate of the vector premium then (as was the case in Kihlstrom and Mirman's (1974) analysis) only pairs of expected utility maximizers with thesame ordinal preferences for outcomes can be ranked in terms of their aversion to increasing risk. However, if we restrict the premium to be a non-negative random variable then comparisons of aversion to increasing risk may be possible between expected utility maximizers withdistinct ordinal preferences for outcomes. The relationship between their utility functions is precisely the multi-dimensional analog of Ross's (1981)global condition forstrongly more risk averse.     

Endogenous risks and the risk premium

This note tries to correct a deficiency of the microeconomic literature on decision making under uncertainty. Indeed, when considering meaningful comparative statics results in situations where risks are at least partially controllable (endogenous), this literature has mostly relied upon the traditional Arrow-Pratt risk aversion functions and has paid very little attention to the definition of the risk premium. However when they defined the risk premium and the risk aversion functions, Arrow and Pratt considered only roulette gambles, i.e. risks totally exogenous to the individual. This note highlights the fact that several definitions of the risk premium may be proposed for endogenous risks. Two of them, already used in the literature, do not preserve the intuitively-appealing properties of the Arrow-Pratt risk premium. An alternative definition is then proposed. It is shown that this new definition of the risk premium applied to endogenous risks exhibits the properties generally admitted for roulette gambles.The three authors have benefitted from Ph. Caperaa's advice and from a referee's comments.     

Background Risks and the Value of a Statistical Life

We examine the effects of background mortality and financial risks on an individual's willingness to pay to reduce his mortality risk (the value of statistical life or VSL). Under reasonable assumptions about risk aversion and prudence with respect to wealth in the event of survival and with respect to bequests in the event of death, background mortality and financial risks decrease VSL. The effects of large mortality or financial risks on VSL can be substantial, but the effects of small background risks are negligible. These results suggest that the commonplace failure to account for background risk in evaluating VSL is unlikely to produce substantial bias in most applications.     

Willingness to accept equals willingness to pay for labor market estimates of the value of a statistical life

Our research clarifies the conceptual linkages among willingness to pay for additional safety, willingness to accept less safety, and the value of a statistical life (VSL). We present econometric estimates using panel data to analyze the VSL levels associated with job changes that may affect the worker’s exposure to fatal injury risks. Our baseline VSL estimates are $7.7 million and $8.3 million (Y$2001). There is no statistically significant divergence between willingness-to-accept VSL estimates associated with wage increases for greater risks and willingness-to-pay VSL estimates as reflected in wage changes for decreases in risk. Our focal result contrasts with the literature documenting a considerable asymmetry in tradeoff rates for increases and decreases in risk. An important implication for policy is that it is reasonable to use labor market estimates of VSL as a measure of the willingness to pay for additional safety.     

Experimental markets for insurance

This article extends the large amount of research on double-oral auction markets to hazards that produce only losses. We report results from a series of experiments in which subjects endowed with low-probability losses can pay a premium for insurance protection. Insurers specify the price at which they are willing to assume the risk of a loss. Insurance prices approach expected value for a large range of probabilities and loss amounts. Subjects seem to realize losses are statistically independent. Prices are not affected by ambiguity about the probability of loss.     

The impact of social security reform on the labor market: The case of Colombia

This paper simulates the effects of three increasingly bolder reforms in the Colombian social protection system: the equalization of salaried and self-employed labor contributions; the removal of payroll taxes, parafiscales; and the complete delinking of social protection benefits from labor status. We collect nationally representative information concerning individual willingness to pay for several packages of social security benefits; identify and quantify – for the first time – three specific distortions caused by existing social security and social assistance systems; and simulate the gains that social protection reforms would bring about in terms of reduced labor distortions. We find that workers in Colombia, regardless of occupation, have a very similar willingness to pay for the full insurance package – below 20% of their labor earnings – and very similar valuation of social protection services – about 50% below par. Labor distortions are large, as expected from very high labor costs, but we quantify an implicit formality tax and informality subsidy ranging between 2 and 27 percent of different representative workers’ earnings. Critically, the long-discussed reforms in Colombia – including the elimination of parafiscales – will not reduce substantially the multiple distortions in its labor market.     

A critical approach to wage devaluation: The case of Spanish economic recovery

In line with the orientation of EU economic policy, the Spanish government has favoured a strategy of internal devaluation as a way of adjusting price levels within the currency union. The results of empirical studies indicate that the internal devaluation applied in Spain does not seem to have attained the desired goals in terms of reducing the relative prices of exports and consolidating a model of growth based on external demand. Indeed, the estimates drawn up show that tailwinds – the depreciation of the euro and the fall in risk premium as results of the measures taken by the ECB, greater economic activity by trading partners and the fall in the price of oil – exercised a decisive influence in the trends followed by the prices of exports and the balance of trade during the period of crisis management in Spain.     

Observing different orders of risk aversion

A decision maker's attitude towards risk is said to be of orderi, i=1, 2, if for every given riskē with expected value zero, the risk premium the decision maker is willing to pay to avoid the risktē goes witht to zero at the same order ast ⁱ. This article presents an experiment testing the order of decision makers' attitudes toward risk. Its major result is that both attitudes exist, each in significant proportions. Moreover, two classes of first-order behavior are defined. The rank-dependent model (Quiggin, 1982) belongs to one, the disappointment aversion model (Gul, 1991) to the other. We show that only the first of these two classes appears among our subjects.     

Flexibility,endogenous risk,and the protection premium

We introduce two types of protection premia. The unconstrained protection premium, ^u, is the individual's willingness to pay for certain protection efficiency given flexibility to adjust optimally the investment in protection. The constrained protection premium, ^c, measures willingness to pay for certain protection efficiency given no flexibility to adjust the investment in protection. ^u depends on tastes and wealth as well as protection technology whereas ^c depends only on technology. We show that ^c cannot exceed ^u and develop necessary conditions for ^c=^u. Optimal protection for an individual with decision flexibility may be larger or smaller than that desired under no flexibility.Journal Paper No. J-15504 of the Iowa Agriculture and Home Economics Experiment Station, Ames, Iowa. Project No. 3048.     

Buying and selling price for risky lotteries and expected utility theory with gambling wealth

I analyze two expected utility models which abandon the consequentialist assumption of terminal wealth positions. In the expected utility of gambling wealth model, in which initial wealth is allowed to be small, I show that a large WTA/WTP gap is possible and the (Rabin in Econometrica, 68(5), 1281–1292, 2000) paradox may be resolved. Within the same model the classical preference reversal which allows arbitrage is not possible, whereas preference reversal (involving buying prices in place of selling prices), which does not allow arbitrage, is possible. In the expected utility of wealth changes model, in which there is no initial wealth, I show that both a WTA/WTP gap as well as the classical preference reversal are possible due to loss aversion, both in its general as well as some specific forms.     

Trade liberalization and factor prices: An application to the U.S. manufacturing sector

The effects of a trade policy on the prices of productive factors have important policy implications, particularly with regard to trade liberalization and protection. This paper examines the empirical evidence of the Stolper-Samuelson theorem for 16 major U.S. manufacturing industries. The theorem asserts that international trade reduces the prices of scarce productive factors and hence decreases their shares of income. The elasticities of prices of finished goods with respect to factor prices are estimated and then rearranged in the form of the row stochastic P-matrix in accordance with the proposition of Uekawa. The inverse of this matrix seems to confirm the weak version of the Stolper-Samuelson theorem.     

Dirty money: Is there a wage premium for working in a pollution intensive industry?

Within a compensating wage differential framework we investigate whether there is a wage premium for working in a pollution intensive industry. Our results for the economy as a whole suggest a small wage premium of approximately one quarter of one percent associated with the risk of working in a dirty job. This premium rises to over fifteen percent for those individuals who work in one of the five dirtiest industries. We also find evidence of a fatal risk wage premium, providing estimates of the value of a statistical life of between ￡12 million and ￡19 million (2000 prices).     

Single-year and multi-year insurance policies in a competitive market

This paper examines the demand and supply of annual and multi-year insurance contracts with respect to protection against a catastrophic risk in a competitive market. Insurers who offer annual policies can cancel policies at the end of each year and change the premium in the following year. Multi-year insurance has a fixed annual price for each year and no cancellations are permitted at the end of any given year. Homeowners are identical with respect to their exposure to the hazard. Each homeowner determines whether or not to purchase an annual or multi-year contract so as to maximize her expected utility. The competitive equilibrium consists of a set of prices where homeowners who are not very risk averse decide to be uninsured. Other individuals demand either single-year or multi-year policies depending on their degree of risk aversion and the premiums charged by insurers for each type of policy.