The Dead-Anyway Effect Revis(It)Ed

18 Pages Posted: 18 Nov 2002

See all articles by Friedrich Breyer

Friedrich Breyer

University of Konstanz - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Stefan Felder

Otto von Guericke Universitaet Magdeburg

Date Written: October 2002

Abstract

In the expected-utility theory of the monetary value of a statistical life, the so-called "dead-anyway" effect discovered by Pratt and Zeckhauser(1996) asserts that an individuals' willingness to pay (WTP) for small reductions in mortality risk increases with the initial level of risk. Their reasoning is based on differences in the marginal utility of wealth between the two states of nature: life and death. However, this explanation is based on the absence of markets for contingent claims, i.e. annuities and life insurance. This paper reexamines the "dead-anyway" effect and establishes two main results: First, for a risk-averse individual without a bequest motive, marginal WTP for survival does increase with the level of risk, but when insurance markets are perfect, this occurs for a different reason than that given by Pratt and Zeckhauser. Secondly, when the individual has a bequest motive and is endowed with a sufficient amount of non-inheritable wealth, the effect of initial risk on WTP for survival is reversed: the higher the initial risk, the lower the value of a statistical life.

Keywords: Value of Life, Expected Utility, Willingness to Pay, Insurance Markets

JEL Classification: D8, H43, I18

Suggested Citation

Breyer, Friedrich and Felder, Stefan, The Dead-Anyway Effect Revis(It)Ed (October 2002). CESifo Working Paper Series No. 805. Available at SSRN: https://ssrn.com/abstract=351641

Friedrich Breyer (Contact Author)

University of Konstanz - Department of Economics ( email )

Fachbereich Wirtschaftswissenschaften Fach D-135
D-78457 Konstanz
Germany
+49 (0)75 31/88-25 68 (Phone)
+49 (0)75 31/88-41 35 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Stefan Felder

Otto von Guericke Universitaet Magdeburg ( email )

Universitaetsplatz 2
Institute fur Sozialmedizin
39106 Magdeburg
Germany

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