Mortality Risk Valuation and Age

Valuing Reductions in Mortality Risk Many environmental policies benefit society by reducing the risk of premature mortality. Air quality regulations lower concentrations of particulate matter that can trigger respiratory and cardiovascular causes of death. Regulations of toxic chemicals and hazardous waste sites reduce exposure to carcinogens and the probability of fatal cancers. Improving water quality can likewise better human health and lower mortality risk. 

Evaluating the economic benefits of mitigating these risks requires estimates of individuals' willingness to pay for mortality risk reduction. The typical term used in policy applications for this income-risk trade-off is the Value of Statistical Life (VSL). This reflects the economic value to society, as evident by the aggregation of individuals' willingness to pay to reduce risk, to prevent one premature death. Suppose that, on average, individuals value a 1 in 10,000 risk reduction by $500. Aggregated over a population of 10,000 individuals, society would derive the benefit of $5 million to avoid one statistical fatality. This fatality is "statistical" because we do not know, ex ante, whose life would be saved by this risk reduction, but we would expect one person out of this population of 10,000 to have his or her life extended by the reduction in risk. Thus, this $5 million is the value of statistical life for this population.

A strident and continuing controversy with respect to the value of statistical life has been whether the benefit of reducing risks to the old is less than for younger age groups. In particular, should there be a "senior discount" when assessing the value of reduced risks to life? This question has drawn the attention of policymakers in a number of countries. In 2000, Canada employed a VSL for the over 65-year-old population that is 25 percent lower than the VSL for the under 65-year-old population. In 2001, the European Commission recommended that member countries use a VSL that declines with age and later started to use a value of statistical life year (VSLY), which implies a VSL that declines proportionally with age. In 2002, the U.S. Environmental Protection Agency conducted analyses of the Clear Skies initiative that included a senior discount. This effort to apply such a discount generated a political firestorm and ultimately led to abandonment of any age adjustments in benefit values assigned by EPA. The Association of Environmental and Resource Economists' new journal, the Review of Environmental Economics and Policy (Volume 1, No. 2, 2007), recently dedicated a symposium on mortality risk valuation and age. RFF Fellow Joe Aldy and Kip Viscusi of Vanderbilt University examine the age-VSL evidence from revealed preference studies, and RFF Senior Fellow Alan Krupnick evaluates comparable research from stated preference studies.

Mortality-risk Valuation and Age: Stated Preference Evidence Alan Krupnick Age Differences in the Value of Statistical Life: Revealed Preference Evidence Joseph E. Aldy and W. Kip Viscusi

The Aldy and Viscusi paper reviews studies that estimate risk reduction benefits by analyzing the everyday market behavior individuals undertake that reveal their income-risk preferences. This line of analysis focuses primarily on the compensation workers receive for bearing a small probability of dying on the job. They find that the value of a statistical life follows an inverted-U shape for workers between 18 and 62 years of age, peaking for those around age 40. This work suggests that a more sophisticated approach to valuing risk reductions would account for the ages of all those affected, instead of simply making a senior discount adjustment for the oldest population. They illustrate the implications of this approach by re-estimating the benefits of the Clear Skies Initiative. The Krupnick paper reviews studies that estimate the benefits for reducing risk through survey methods that require individuals to state how they would tradeoff income with a small change in mortality risk. These survey studies typically present information about a risk reduction program and then ask survey participants whether they would be willing to pay a specified amount (for purchasing a product with mortality risk reduction benefits) for the program. Some of these studies support a senior discount, some do not. And the best studies are found on both sides of this debate. He concludes that the stated preference evidence rules our a proportional decline in the VSL with age but that otherwise, the literature is not sufficient to apply a senior discount to regulatory benefits estimates.