Beneficial safety decreases

We construct a model of rational choice under risk with biased risk judgement. On its basis, we argue that sometimes, a regulator aiming at maximising social welfare should affect the environment in such a way that it becomes ‘less safe’ in common perception. More specifically, we introduce a bias into each agent’s choice of optimal risk levels: consequently, in certain environments, agents choose a behaviour that realises higher risks than intended. Individuals incur a welfare loss through this bias. We show that by deteriorating the environment, the regulator can motivate individuals to choose behaviour that is less biased, and hence realises risk levels closer to what individuals intended. We formally investigate the conditions under which such a Beneficial Safety Decrease—i.e. a deteriorating intervention that has a positive welfare effect—exists. Finally, we discuss three applications of our model.     

Does product complexity matter for competition in experimental retail markets?

We describe a first experiment on whether product complexity affects competition and consumers in retail markets. We are unable to detect a significant effect of product complexity on prices, except insofar as the demand elasticity for complex products is higher. However, there is qualified evidence that complex products have the potential to induce consumers to buy more than they would otherwise. In this sense, consumer exploitability in quantities cannot be ruled out. We also find evidence for shaping effects: consumers’ preferences are shaped by past experience with prices, and firms may in principle exploit this to sell more.     

Digit ratios (2D:4D) as predictors of risky decision making for both sexes

Many important decisions involve financial risk, and substantial evidence suggests that women tend to be more risk averse than men. We explore a potential biological basis of risk-taking variation within and between the sexes by studying how the ratio between the length of the second and fourth fingers (2D:4D) predicts risk-taking. A smaller 2D:4D ratio has been linked to higher exposure to prenatal testosterone relative to estradiol, with men having lower ratios than women. In financially motivated decision-making tasks, we find that men and women with smaller 2D:4D ratios chose significantly riskier options. We further find that the ratio partially explains the variation in risk-taking between the sexes. Moreover, for men and women at the extremes of the digit-ratio distribution the difference in risk-taking disappears. Thus, the 2D:4D ratio partially explains variation in financial risk-taking behavior within and between sexes and offers evidence of a biological basis for risk-taking behavior.     

A Diamond-Stiglitz approach to the demand for self-protection

The existing research concerning the relationship between risk aversion and prudence and the demand for self-protection assumes that the loss variable follows a Bernoulli distribution, and that changes in the level of self-protection are mean preserving. The analysis here replaces these two very strong conditions with ones which are more general. When doing this, the method of analysis is also significantly modified. This modification includes representing a change in the level of self-protection using the procedure developed by Diamond and Stiglitz (Journal of Economic Theory 8:337-360, 1974) for representing a change in risk. This alternate representation allows the existing findings to be generalized considerably, and also simplifies the analysis.     

Two-sided intergenerational moral hazard,long-term care insurance,and nursing home use

Two-sided intergenerational moral hazard occurs (i) if the parent’s decision to purchase long-term care (LTC) coverage undermines the child’s incentive to exert effort because the insurance protects the bequest from the cost of nursing home care, and (ii) when the parent purchases less LTC coverage, relying on child’s effort to keep him out of the nursing home. However, a “net” moral hazard effect obtains only if the two players’ responses to exogenous shocks fail to neutralize each other, entailing a negative relationship between child’s effort and parental LTC coverage. We focus on outcomes out of equilibrium, interpreting them as a break in the relationship resulting in no informal care provided and hence high probability nursing home admission. Changes in the parent’s initial wealth, LTC subsidy received, and child’s expected inheritance are shown to induce “net” moral hazard, in contradistinction to changes in child’s opportunity cost and share in the bequest.     

Assessing the Concept of the ‘Insecure‐Other’ Category in the Cassidy–Marvin Scheme: Changes Between 4 and 6 Years in the English and Romanian Adoptee Study

We set out to explore the meaning of the attachment categories in the Cassidy/Marvin strange situation procedure, as employed in the home, using data from a longitudinal study of children adopted into UK families up to the age of 42 months from Romanian institutions, and of adopted children without the experience of institutional care––both groups being assessed at 4 and 6 years of age. Inter‐rater reliability was found to be good. Security (meaning the use of the parent as a secure base and no negative behavior on reunion) was the modal categorical rating in both the institution‐reared and comparison groups, but the category of anomalous non‐normative behavior (meaning a lack of any ordered attachment behavior as covered by the standard ratings), previously labeled ‘insecure‐other’, was more common in the institution‐reared children. Because this was unassociated with the usual manifestations of insecurity (such as avoidance or resistance) and because it was largely evident in interactions with the stranger, it is concluded that the adjective ‘insecure’ was not appropriate. Although this ‘insecure‐other’ category was associated with disinhibited attachment as reported by parents (meaning a lack of differentiation among adults, a willingness to go off with strangers and a lack of checking back with parents in anxiety‐provoking situations), it did not prove to be a good index of disinhibited attachment because changes over time in the ‘insecure‐other’ category were not associated with changes in the rate of disinhibited attachment. Also, whereas the rate of ‘insecure‐other’ fell markedly in the institution‐reared group between 4 and 6 years of age, it rose in the comparison group, raising queries over its meaning.     

Policy relevant heterogeneity in the value of statistical life: New evidence from panel data quantile regressions

We examine differences in the value of statistical life (VSL) across potential wage levels in panel data using quantile regressions with intercept heterogeneity. Latent heterogeneity is econometrically important and affects the estimated VSL. Our findings indicate that a reasonable average cost per expected life saved cut-off for health and safety regulations is 7 million to7 million to 8 million per life saved, but the VSL varies considerably across the labor force. Our results reconcile the previous discrepancies between hedonic VSL estimates and the values implied by theories linked to the coefficient of relative risk aversion. Because the VSL varies elastically with income, regulatory agencies should regularly update the VSL used in benefit assessments, increasing the VSL proportionally with changes in income over time.     

Demand for health risk reductions: A cross-national comparison between the U.S. and Canada

Using a large stated preference survey conducted across the U.S. and Canada, we assess differences in individual willingness to pay (WTP) for health risk reductions between the two countries. Our utility-theoretic choice model allows for systematically varying marginal utilities for avoided future time in different adverse health states (illness-years, recovered/remission years, and lost life-years). We find significant differences between Canadian and U.S. preferences. WTP also differs systematically with age, gender, education, and marital status, as well as a number of attitudinal and subjective health-perception variables. Age profiles for WTP are markedly different across the two countries. Canadians tend to display flatter age profiles, with peak WTP realized at older ages.     

Simple methods for evaluating and comparing binary experiments

We consider a confidence parametrization of binary information sources in terms of appropriate likelihood ratios. This parametrization is used for Bayesian belief updates and for the equivalent comparison of binary experiments. In contrast to the standard parametrization of a binary information source in terms of its specificity and its sensitivity, one of the two confidence parameters is sufficient for a Bayesian belief update conditional on a signal realization. We introduce a confidence-augmented receiver operating characteristic for comparisons of binary experiments for a class of “balanced” decision problems, relative to which the confidence order offers a higher resolution than Blackwell’s informativeness order.

Where observation is concerned, Chance favors only the prepared mind. —Louis Pasteur (1822–1895).