Is The Price Right? Reexamining the Relationship Between Age and the Value of Statistical Life Daniel Eric Herz-Roiphe Harvard College 2010 M-RCBG Associate Working Paper Series | No. 5 Winner of the 2010 John Dunlop Undergraduate Thesis Prize in Business and Government The views expressed in the M-RCBG Fellows and Graduate Student Research Paper Series are those of the author(s) and do not necessarily reflect those of the Mossavar-Rahmani Center for Business & Government or of Harvard University. The papers in this series have not undergone formal review and approval; they are presented to elicit feedback and to encourage debate on important public policy challenges. Copyright belongs to the author(s). Papers may be downloaded for personal use only. Mossavar-Rahmani Center for Business & Government Weil Hall | Harvard Kennedy School | www.hks.harvard.edu/mrcbg IS THE PRICE RIGHT? REEXAMINING THE RELATIONSHIP BETWEEN AGE AND THE VALUE OF STATISTICAL LIFE An Essay Presented by Daniel Eric Herz-Roiphe to The Committee on Degrees in Social Studies in partial fulfillment of the requirements for a degree with honors of Bachelor of Arts Harvard University March 2010 TABLE OF CONTENTS Introduction: Pricing Life and Discounting Death……………………………………2 Chapter 1: Age, Cognition, and VSL ………………………………………………17 Chapter 2: Results of an Online Contingent Valuation Survey……………………...61 Chapter 3: Rethinking Regulation…………………………………………………..96 Conclusion: The Value of Price……………………………………………………130 References……………………………………………………………………….137 Appendix………………………………………………………………………...154 INTRODUCTION: PRICING LIFE AND DISCOUNTING DEATH “Insanity,” Albert Einstein once noted, “is doing the same thing over and over again and expecting different results.” So when the eminently sane Environmental Protection Agency (EPA) Administrator Christine Todd Whitman got up to speak to an audience of seniors on May 7, 2003, in Baltimore, Maryland— the sixth and final stop on a “listening tour” designed to engage with the elderly on environmental regulation—she knew what was coming.1 At each of the past five events, Whitman and her colleagues had been treated to a barrage of protests and complaints from a well-mobilized army of indignant senior citizens. As the circus gathered attention, the tour—conceived as a form of community outreach—was quickly becoming an embarrassment.2 The cause of all the trouble was the recently released Methodologies for the Benefit Analysis of the Clear Skies Initiative —the kind of dry, technical document that is rarely read by anyone outside of policymaking circles. Somehow, this dense examination of the costs and benefits of an emissions-reducing measure had managed to turn heads—heads that now spent their time shouting at Christie Whitman. It might not have seemed surprising that the report caused so much controversy, since it did something that many people find repulsive: It put a price on human life. Yet this alone was hardly notable. For years, the EPA and other similar 1 For a description of the tour and its stops, see "Public Listening Sessions | Aging Initiative | US EPA," U.S. Environmental Protection Agency, http://www.epa.gov/aging/listening/index.htm (accessed March 1, 2010). 2 Katherine Q. Seelye and John Tierney, "E.P.A. Drops Age-Based Cost Studies," New York Times, May 7, 2003, Late ed., sec. A. 2 agencies have devised ways to translate prevented fatalities into dollars and cents.3 Ever since the early 1980s, when cost-benefit analysis became a required part of the regulatory process by executive order, the lives saved through regulation have been monetized and tallied.4 Pricing a life is no easy task. But it is also an unavoidable one, as mortality risk reductions comprise most of the benefits for many regulations.5 For the past 40 years, economists have tackled this problem by calculating the value of statistical life (VSL).6 Given the inherent obstacles to reliably determining how much people are willing to pay to avoid certain death, their method instead examines tradeoffs between money and small mortality risks. Suppose individuals are willing to pay $500 to eliminate a 1 in 10,000 chance of death. Then VSL is the amount that 10,000 people would pay to eliminate one “statistical death,” (which in this case is $5 million = $500 x 10,000). Alternatively, the $500 figure represents an individual’s WTP per unit of risk, in which case it can be multiplied by 10,000 to once again obtain a $5 million value of life.7 Either way of thinking about the problem produces equivalent results. The important takeaway is that preferences 3 See Lisa Robinson, "How U.S. Government Agencies Value Mortality Risk Reductions," Review of Environmental Economics and Policy 1, no. 2 (Summer 2007), for an overview of current practice. 4 CBA was originally required under Reagan by Exec. Order No. 12291, 3 C.F.R. (1981). Clinton continued the practice with Exec. Order No. 12866, 3 C.F.R. (1993), which makes similar demands of agencies, but also asks them to consider “distributive concerns” when conducting analyses. See Cass R. Sunstein, "Congress, Constitutional Moments, and the Cost-Benefit State," Stanford Law Review 48, no. 2 (January 1996), for an overview of the rise of CBA in American regulatory policy. 5 For example, 80% of the $22 trillion of benefits of the Clean Air Act from 1970-1999 came from prevented fatalities according to United States Environmental Protection Agency, The Benefits and Costs of the Clean Air Act, 1970-1990 (Washington, D.C., 1997). 6 See Thomas C. Schelling, "The Life You Save May Be Your Own," in Problems in Public Expenditure Analysis. Papers presented at a conference of experts held Sept. 15-16, 1966, ed. Samuel B. Chase (Washington: Brookings Institution, 1968) and E.J. Mishan, "Evaluation of Life and Limb: A Theoretical Approach," Journal of Political Economy 79, no. 687 (1971), for the origins of this approach. 7 See W. Kip Viscusi, "Value of Life," in The New Pagrave Edition of Economics, ed. Steven N. Durlaufe and Lawrence E. Blume, 2nd ed. (New York: Palgrave Macmillan, 2008), for an introduction to the concept. 3 between risk and wealth determine how much people will pay to save one statistical life.8 Under the Reagan Administration, this VSL approach came to dominate federal regulatory policy, replacing older techniques such as the human capital method—which calculates the cost of death from the net present value of a deceased individual’s future earnings stream.9 At the time, not everyone was thrilled about VSL’s newfound prominence. In 1985, an editorialist in the Washington Post asserted that inquiring into the proper monetary value of life was a question that “could only be asked in Washington.” Elsewhere, “death wears a face.”10 Today, some still find it morally abhorrent to put a price on the seemingly unquantifiable.11 But the dissidents are less vocal, and VSL calculations have become so ubiquitous in public policy that the practice has lost some of its controversial character.12 It’s not going anywhere, nor is it clear that it should—at least theoretically, it promotes the development of a cost-efficient federal regulatory regime, capable of saving more lives for less money.13 8 The use of the adjective “statistical” in “value of statistical life” is meant to distinguish saving a person in the abstract and protecting an identified individual. 9 See W. Kip Viscusi, "The Value of Risks to Life and Health," Journal of Economic Literature 31, no. 4 (December 1993), 1942-1943, for a brief account, and W. Kip Viscusi, Fatal Tradeoffs: Public and Private Responsibilities for Risk (New York: Oxford University Press, 1992), 149-293, for a more comprehensive treatment. 10 Pete Earley, "What's a Life Worth," Washington Post, June 9, 1985, Magazine sec. 11 For example, Frank Ackerman and Lisa Heinzerling, Priceless: On Knowing the Price of Everything and the Value of Nothing (New York: New Press, 2004). 12 See Robinson, “How U.S. Government Agencies Value Mortality Risk Reductions” and Lisa Robinson, Valuing Mortality Risk Reductions in Homeland Security Regulatory Analysis, report prepared for U.S. Customs and Border Patrol, Department of Homeland Security (2008) for accounts of how ubiquitous the practice is across many different agencies. 13 See Robert W. Hahn and Cass R. Sunstein, "A New Executive Order for Improving Federal Regulation? Deeper and Wider Cost-Benefit Analysis," University of Pennsylvania Law Review 150, no. 5 (May 2002), 1489-1515 both for a discussion of the potential for CBA to improve lifesaving regulation, and for a critical assessment of whether it has accomplished this goal so far. 4 So anyone who had been paying attention for the past 20 years wouldn’t have been shocked by the EPA’s Clear Skies regulatory analysis solely because it tried to put a price on life. What did ruffle feathers, however, was exactly how the EPA went about matching up lives and dollars. In its primary benefit calculation, the Agency’s Clear Skies report applied a constant VSL of $6.1 million to any life saved by the regulation. But in a sensitivity analysis, the EPA used what came to be known as the “senior discount.” While lives of individuals under 70 were valued at $3.7 million, persons over 70 were given a VSL of only $2.1 million—a discount of 37 percent.14 Judging by the furor that ensued, one would have guessed that the EPA had never done anything like this before. In fact, it had carried out similar procedures more than once under the Clinton Administration.15 But even if this wasn’t the first time that the EPA had tried its hand at senior discounting, an army of angry advocates sprung up to ensure that it would be the last.