The value of mortality risk reductions in Delhi,India

We interviewed commuters in Delhi, India, to estimate their willingness to pay (WTP) to reduce their risk of dying in road traffic accidents in three scenarios that mirror the circumstances under which traffic fatalities occur in Delhi. The WTP responses are internally valid: WTP increases with the size of the risk reduction, income, and exposure to road traffic risks, as measured by length of commute and whether the respondent drives a motorcycle. As a result, the value of a statistical life (VSL) varies across groups of beneficiaries. For the most highly-exposed individuals the VSL is about 150,000 Purchasing Power Parity (PPP) dollars.

Precautionary behavior and willingness to pay for a mortality risk reduction: Searching for the expected relationship

This paper examines within-sample correlation between six different precautionary behaviors and stated willingness to pay for a mortality risk reduction. The paper also shows estimates of the value of a statistical life based on seat belt and bicycle helmet use as well as based on the stated willingness to pay for a risk reduction in traffic mortality. Contrary to the theoretical expectations, no correlation is found between precautionary behavior and stated willingness to pay. One major explanation is that females and the elderly take more precaution, but state a lower WTP for a risk reduction. The estimates of VSL from the different approaches are $11.0 million, $5.0 million and $2.8 million from stated WTP, bicycle helmet use and seat belt use, respectively.

Paying for permanence: Public preferences for contaminated site cleanup

We use conjoint choice questions to investigate the preferences of people in four cities in Italy for income and future/permanent mortality risk reductions delivered by contaminated site remediation policies. The VSL is €5.6 million for an immediate risk reduction. If the risk reduction takes place 20 years from now, the implied VSL is €1.26 million. Respondents’ implicit discount rate is 7%. The VSL depends on respondent characteristics, familiarity with contaminated sites, concern about the health effects of exposure to toxicants, having a family member with cancer, perceived usefulness of public programs and beliefs about the goals of government remediation programs.

Valuing publicly sponsored research projects: Risks,scenario adjustments,and inattention

Survey-based choice scenarios used to value non-market public goods typically preclude any risk that the benefits described may not be delivered. Our survey specifies explicit risks of (a) outright program failure and (b) program redundancy due to possible private sector substitutes. Additionally, most analyses assume that survey subjects fully accept these scenarios and that all provided information receives their complete attention. Our discounted expected utility model of choice accommodates both these objective risks and the possibility of subjective scenario adjustment or selective inattention by respondents. We then counterfactually simulate willingness-to-pay in the absence of these distortions.

Statistical vs. identified lives in benefit-cost analysis

Evaluation of projects that affect mortality risk usually assumes that risk changes are small and similar across individuals. In reality, risks differ among individuals and information about risk heterogeneity determines the extent to which affected lives are “statistical” or “identified” and influences the outcome of benefit-cost analysis (BCA). The effects of information about risk heterogeneity on BCA depend on, inter alia, whether information concerns heterogeneity of baseline or change in risk and whether valuation uses compensating or equivalent variation. BCA does not systematically favor identified over statistical lives. We suggest some political factors that may explain the apparent public bias.

Valuing risks of death from terrorism and natural disasters

This paper uses a random utility model to examine stated preferences for the valuation of public risks of fatalities from terrorist attacks and natural disasters. Traffic-related deaths serve as the common reference point in two series of pairwise risk-risk tradeoff choices. Even after taking into account differences in respondent risk beliefs, the nationally representative sample values the prevention of terrorism deaths almost twice as highly as preventing natural disaster deaths and at about the same level as preventing deaths from traffic accidents, which pose greater personal risk. Education, seatbelt usage, political preferences, and terrorism risk beliefs affect valuations in the expected manner.

A Bayesian examination of information and uncertainty in contingent valuation

A theoretical framework is presented to explain how agents respond to information under uncertainty in contingent valuation surveys. Agents are provided with information signals and referendum prices as part of the elicitation process. Agents use Bayesian updating to revise prior distributions. An information prompt is presented to reduce hypothetical bias. However, we show the interaction between anchoring and the information prompt creates a systematic bias in willingness to pay. We test our hypotheses in an experimental setting where agents are asked to make a hypothetical, voluntary contribution to a public good. Experimental results are consistent with the model.

Conspicuous conservatism in risk choice

We analyze the risk levels chosen by agents who have private information regarding their quality, and whose performance will be judged and rewarded by outsiders. Assume that risk choice is observable. Agents will choose risk strategically to enhance their expected reputations. We show that conspicuous conservatism results: agents of different qualities choose levels below those that would be chosen if quality were observable. This happens because bad agents must cloak their identity by choosing the same risk level as good agents, and good agents are more likely to distinguish themselves if they reduce the risk level. Our results contrast starkly with those for the case when risk choice cannot be observed.

Conditional payments and self-protection

Self-protection can be financed either by upfront payments or by conditional payments (or contingent fees) in which individuals pay a provider only when a favorable outcome is realized. We find that, from the vantage point of a risk-averse individual, conditional payments welfare dominate upfront payments in the state-independent framework, but upfront payments welfare dominate conditional payments in the state-dependent framework. Moreover, more risk aversion always implies more self-protection under conditional payments, for both state-independent and state-dependent frameworks. In contrast, it has been previously argued that more risk aversion does not necessarily imply more self-protection under upfront payments.

Predicted risk perception and risk-taking behavior: The case of impaired driving

Research suggests an association between risk perception and risk-taking behavior in a variety of contexts. There is empirical evidence that perceived risk is generally biased and that perception of risk influences behavior. Perception of risk can be endogenous. It is therefore more appropriate to instrument risk perception. This article studies the perception of the risks associated with impaired driving and the relation between predicted risk perception and driving behavior. We survey a sample of license-holders, half of whom are drivers with a past conviction for impaired driving, the other half or control group without such conviction. Predicted perceptual biases are shown to influence actual driving behavior.

Perception of own death risk

Individuals’ perception of their own road-traffic and overall mortality risks are examined in this paper. Perceived risk is compared with the objective risk of the respondents’ peers, i.e. their own gender and age group, and the results suggest that individuals’ risk perception of their own risk is biased. For road-traffic risk we obtain similar results to what have been found previously in the literature, overassessment and underassessment among low- and high-risk groups, respectively. For overall risk we find that all risk groups underestimate their risk. The results also indicate that men's risk bias is larger than women’s.

Pre-commitment and flexibility in a time decision experiment

An agent with dynamically inconsistent preferences may deviate from her plan of action as the future draws near. An exponential discounter may do exactly the same when facing an uncertain future. Through an experiment we compare preference-based vs. uncertainty-based explanations for choice reversal over time by eliciting choices for pre-commitment and flexibility. Evidence of widespread commitment favors a preference-based explanation.

Risk preferences and changes in background risk

We present two theorems that yield necessary and sufficient conditions for first- and second-degree stochastic dominance deteriorations of background risk to increase risk aversion with respect to foreground risk. We require that any change in a foreground risk that is undesirable remains so after a background risk changes in a way that is either unfair, undesirable in the sense of reducing expected utility, or undesirable in the sense of increasing expected marginal utility. Our results thus characterize utility functions that are, respectively, vulnerable, proper, or standard with respect to changes in background risk.

Cancer premiums and latency effects: A risk tradeoff approach for valuing reductions in fatal cancer risks

Many studies estimate individuals’ values for avoiding fatality risks; however, most value-of-statistical-life studies focus on accident-related deaths. Consequently, little is known about preferences for avoiding other fatal risks, such as cancer. Cancer may engender strong feelings of dread, leading to a “cancer premium,” but cancer latency periods may have the opposite effect. Using a national survey, we elicit relative preferences for avoiding fatal cancer and auto-accident risks. We find strong preferences for avoiding cancer risks. With a 5-year latency, they are valued roughly three times greater than immediate accident risks, declining to 50% greater for a 25-year latency.

Whom should we believe? Aggregation of heterogeneous beliefs

We examine the collective risk attitude of a group with heterogeneous beliefs. We prove that the wealth-dependent probability distribution used by the representative agent is biased in favor of the beliefs of the more risk tolerant consumers. Moreover, increasing disagreement on the state probability raises the state probability of the representative agent. It implies that when most disagreements are concentrated in the tails of the distribution, the perceived collective risk is magnified. This can help to solve the equity premium puzzle. We show that the trade volume and the equity premium are positively correlated.

Gender,risk and stereotypes

This paper reports results from an economic experiment where respondents are asked to make choices between risky outcomes for themselves and others. We investigate whether subjects’ own risk preferences and gender stereotypes are reflected in the predictions they make for the risk preferences of others and the way this occurs. When predicting other people’s risk preferences, the respondents tend to use a combination of their own risk preferences and stereotypes. Moreover, when making risky choices for others, the respondents generally use a combination of their own risk preferences and their average predicted risk preference of the targeted group.

Correcting expected utility for comparisons between alternative outcomes: A unified parameterization of regret and disappointment

A unified parameterization of an expected utility model corrected for regret and disappointment effects is presented, constrained to conform to a well-known choice pattern, the common consequence effect, a special case of the Allais paradox. For choices subject to regret and disappointment effects to be consistent with this choice pattern, the function that corrects the utility of the obtained outcome has to have a positive second derivative for its regret component and a negative second derivative for its disappointment component. These hypothesized functional forms make predictions about the relative effect that small vs. large differences between obtained and alternative outcomes should have on people’s experiences of regret or disappointment.

Individual decision-making experiments with risk and intertemporal choice

Many decisions require tradeoffs over time and in the presence of risk. To examine interactions between risk and intertemporal effects we developed a laboratory experiment. In the experiment, subjects choose between payoffs that take place at different points in time. We find that very few subjects are consistently risk averse or risk loving. Instead, we find that subjects are less patient in the presence of risk. We also find that increased risk decreases subjects’ patience levels. However, we do not find evidence that the effect of risk on the intertemporal decision depends on the length of the temporal delay.

Adverse selection,moral hazard and propitious selection

We propose a simple model with preference-based adverse selection and moral hazard that formalizes the cherry picking/propitious selection argument. This argument assumes that individuals differ in risk aversion, potentially resulting in more risk averse agents buying more insurance while being less risky. The propitious selection argument is summarized by two properties: regularity (more risk averse agents exert more caution) and single-crossing (more risk averse agents have a higher willingness to pay for insurance). We show that these assumptions are incompatible with a pooling equilibrium, and that they do not imply a negative correlation between risk and insurance coverage at equilibrium.