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Is survival a luxury good? Income elasticity of the value per statistical life

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Abstract

The value of a change in mortality risk is conventionally described by the marginal rate of substitution between income and mortality risk–the value per statistical life (VSL). The income elasticity of VSL is important for estimating how the value of mortality risk varies with time (for evaluating programs with long-lived effects) and across populations with different income levels (for evaluating programs with international consequences). Previous estimates of income elasticity based on meta-analysis of wage-differential studies and cross-sectional comparisons in stated-preference studies suggest values between about one-half and one. We present new estimates based on a 16-year series of wage-differential estimates in Taiwan. Between 1982 and 1997, estimated VSL increased by a factor of five while household labor earnings increased by 60 percent, per capita GDP increased two-and-a-half fold, and the occupational fatality rate in manufacturing and service industries decreased by half. Comparing the growth of VSL with that of household income implies the income elasticity is between about two and five, but this estimate may be biased by the endogeneity of VSL, which is affected by workers’ job choices. Using a two-stage approach to control for endogeneity yields estimates of the income elasticity of VSL between two-thirds and one, consistent with estimates from other approaches.

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Notes

  1. Note that the income elasticity of VSL is the elasticity of the value of a marginal increase in survival probability, not the elasticity of the increase in quantity demanded at a fixed price. Luxury goods are usually defined as having an income elasticity of demand greater than one. See Flores and Carson (1997) for discussion of the relationship between the income elasticities of value and of demand.

  2. In related work, Aldy and Viscusi (2008) find that age-specific VSL is larger for later birth cohorts, which they attribute to secular increases in lifetime income.

  3. In October 1989, the Taiwan government initiated large engineering projects to promote development and allowed the employment of foreign construction workers. By the end of 1991, there were 2,999 foreign workers in Taiwan. Soon afterward, the government allowed the manufacturing and care-giving industries to adopt foreign workers. By the end of April 2003, their number reached 304,556.

  4. Pilossoph and Wee (2021) attribute the marital wage premium to increases in a worker’s reservation wage and acceleration of job promotion.

  5. If the set of available jobs is discrete, his VSL is bounded by the slopes of the line segments between the optimal job and the (undominated) neighboring jobs that present higher and lower risks, respectively.

  6. Other papers that have used a similar two-stage approach to investigate how VSL varies with individuals’ characteristics include Viscusi and Moore (1989) and Moore and Viscusi (1990), who examined how VSL depends on life expectancy, and Aldy and Viscusi (2008), who examined how it depends on age and birth cohort.

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Acknowledgements

The authors thank Maureen Cropper, V. Kerry Smith, W. Kip Viscusi, an anonymous referee, and seminar participants at the NBER Summer Institute, Harvard University, Toulouse School of Economics, Centre International de Recherche sur l’Environnement et le Développement (CIRED), and the American Economic Association and Society for Benefit-Cost Analysis annual conferences for helpful comments. JKH acknowledges financial support from the U.S. National Science Foundation (award number 1824492) and the French National Research Agency (ANR) under the Investments for the Future program (Investissements d’Avenir, grant ANR-17-EURE-0010).

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Hammitt, J.K., Liu, JT. & Liu, JL. Is survival a luxury good? Income elasticity of the value per statistical life. J Risk Uncertain 65, 239–260 (2022). https://doi.org/10.1007/s11166-022-09397-6

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