Governments and corporations throughout the world set a price on life either explicitly or implicitly. How do they do this and are current practices sensible? In this article, I focus on how fatality risks are valued prospectively. What should be the cost of the safety cutoff used by the government in setting the stringency of health and safety standards, and what costs should corporations incur in setting product safety levels? As I show in my new book, Pricing Lives: Guideposts for a Safer Society, there has been a systematic tendency throughout the world to undervalue risks to life.
The pertinent economic measure of the value of reducing risks to life is society’s willingness to pay for the risk reduction, or what is often referred to as the value of a statistical life (VSL). Suppose, for example, that a group of 10,000 workers each required $900 in extra pay to face an annual fatality risk of 1/10,000. On average, there would be one expected death for which the group must be compensated $9 million. My current estimate of the VSL for the U.S. based on labor market studies of how much workers are paid for the extra risk is that the figure is about $10 million. While labor market studies are the primary focus in setting U.S. government estimates of the VSL, there are other approaches that can be used as well. The United Kingdom and OECD have placed primary emphasis on survey studies that ask people how much they would be willing to pay for greater safety, while Australia relies on a review of both labor market and survey evidence.
Regardless of the approach, the VSL dwarfs the value of court awards in wrongful death cases, usually by an order of magnitude. This discrepancy does not imply that court awards are wrong. But they serve a different purpose. Their principal function is to compensate the survivors for economic losses such as the income loss and medical costs. Court awards are also retrospective and are not usually targeted at valuing the prevention of risks to life.
Wrongful death cases were a well-established practice before government agencies began to attempt to monetize risks to life. As a result, governments tended to use the wrongful death awards as a reference point for what value they should place on the reduced fatality risks due to government programs. Moreover, even when governments shifted to the VSL approach, there was a tendency to remain anchored on the earlier wrongful death amounts so that the value of fatality risks increased only gradually to a more appropriate level.
Unfortunately, there are not reliable estimates of the VSL for all countries throughout the world. Undertaking labor market studies is often not feasible given available data, and survey studies are both costly and sometimes less reliable than valuations implied by decisions people actually make. As a result, I have suggested that my U.S. $10 million number be the baseline figure and that this amount be adjusted proportionally for other countries based on income level differences. Notwithstanding this downward income adjustment, my approach would boost the value of fatality risks throughout the world. My projected value of $7.9 million for Australia would double that country’s VSL, and my $7.1 million figure for the United Kingdom would triple its current value. Much lower figures would be pertinent for poorer countries, but these amounts nevertheless would boost the value these countries place on safety.
While government agencies have substantial leeway to value fatality risks explicitly, companies may be vulnerable to attack for doing so, and in the United States, firms have been sanctioned with very large punitive damages awards for valuing health risks in monetary terms. To foster more responsible corporate risk analyses, I have proposed that plaintiffs not be permitted to introduce evidence of corporate risk analyses that use the VSL. Reducing companies’ vulnerability to legal challenges for such responsible corporate risk analyses will enable companies to have the same ability that government agencies have in rectifying the current undervaluation of life.
W. Kip Viscusi is the University Distinguished Professor of Law, Economics, and Management at Vanderbilt Law School.