2. The primary source of estimates of the value of statistical life are from stu

Question

2. The primary source of estimates of the value of statistical life are from studies that trade off wages with mortality risk. Greenstone, Ryan and Yankovich (2012 study how bonuses (a wage increase) cause members of the US Army to reenlist. They observe various bonus levels and they observe different levels of implied risk from service, due to differences in the roles (jobs) that service members have, as well as the types of combat situations currently taking place. They find a VSL that is less than half of standard estimates based on the wider US job market. This smaller estimate is not surprising. Briefly explain why you would expect their study to reveal a low estimate. (2 points)

Explanation / Answer

The economic justification for regulations that affect human health and safety relies critically on the monetized value of risk reductions. In an effort to obtain revealed preference estimates of the value individuals place on reducing mortality risks, a large empirical literature has developed that employs hedonic wage models to estimate the value individuals place on reducing hazards faced at the workplace. Such estimates are used to compute the “value of a statistical life” (VSL),2 which in turn is used in federal regulatory impact analyses to monetize the benefits of life-saving policies. Despite decades of empirical research, the credibility of VSL estimates obtained from hedonic wage models continues to be the subject of considerable debate (e.g., Black, Galdo and Liu 2003; U.S. OMB 2003; Ashenfelter and Greenstone 2004; Robinson 2007; Cameron 2010; U.S. EPA 2010; Cropper, Hammitt and Robinson 2011). The ongoing academic and policy interest in finding reliable estimates for the VSL is due, in no small part, to the remarkably large role that the VSL has in determining benefit-cost ratios for many federal policies. A recent review of the benefits and costs of 115 major federal regulations promulgated over the past decade indicates that up to 70% of the total benefits across all rules considered are directly attributable to the monetized value of reducing early mortality (U.S. OMB 2013).3 These benefits are computed by multiplying the estimated number of lives saved as a result of the regulation by an agency’s preferred point-estimate for the VSL. wage studies focused on estimating the VSL typically employ cross-sectional or panel data models to estimate compensating wage differentials associated with increased occupational risk.

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