Pricing Lives for Corporate and Governmental Risk Decisions

Abstract

The value of a statistical life (VSL) is the most influential single parameter used in calculating the benefits of governmental regulations. While there are some inter-agency differences, there is a commonality in the conceptual approach, the central role of mortality risk valuation in benefit assessment, and the general range of valuations used. Corporate risk decisions are based on a less rigorous risk analysis procedure. As typified by the GM ignition switch recall problems and the company’s lax corporate safety culture, there often is little systematic corporate balancing of cost and risk. This suppression of safety concerns may be attributable to the adverse experiences automobile companies had after conducting risk analyses which valued fatalities based on damages awards for wrongful death, and in response juries levied blockbuster punitive damages awards. Instead, companies should adopt the value of a statistical life in its product risk decisions. Companies also should be provided with a safe harbor reference point for responsible risk decisions. Regulatory agencies should use the VSL in setting regulatory sanctions.

Keywords: value of a statistical life, GM ignition switch, safety, risk, VSL

JEL Classification: I10, I18, K32, J28, J17