On Balance: Extending the Domain of the Value of a Statistical Life
The value of a statistical life (VSL) serves as the linchpin in the evaluation of prospective risk and environmental regulations. The estimated rate of tradeoff between fatality risks and money provides the basis for government agencies to monetize mortality risk reductions. For several decades, the VSL has been solidly entrenched in the benefit components of regulatory impact analyses. Recently, U.S. government agencies have used VSL estimates between $9 million and $11 million to estimate the prospective benefits for each expected death that is prevented by government regulations. The VSL sets the efficient price for small changes in risk, which is an efficiency reference point that has general applicability.
This article elaborates on the argument for the expanded use of the VSL that was presented in my book, Pricing Lives: Guideposts for a Safer Society (Princeton University Press, 2018). I advocate the application of the VSL in a broad range of contexts. The additional venues where the VSL could play an instrumental role include evaluation of risk policies, setting the magnitude of sanctions for regulatory violations, the determination of corporate liability for product risks, and setting the magnitude of damages in court cases.
The policy applications considered in the article include benefit-cost analyses of Superfund cleanups and evaluations of defense expenditures. Most Superfund cleanup efforts impose costs per case of cancer averted that are outside of any reasonable benefit-cost range. While these cleanup efforts are not subject to benefit-cost tests, targeting cleanups based on the VSL would save more lives at less cost than current policies. As indicated in my Pricing Lives book, the main problem is that cleanup policies are not targeted in a cost-effective manner. Focusing on sites with a low cost per case of cancer averted and restricting cleanup efforts to those for which the cost per cancer case is below the VSL would save more lives than current cleanup efforts that do not incorporate cost-effectiveness considerations.
The defense-related policy applications in the article consider the level of safety of military hardware and the mortality costs of war. Kniesner, Leeth, and Sullivan used the VSL to assess the desirability of the gradation of armor for military vehicles.1 The optimal degree of armor depended on vehicle usage and likely mortality risks so that heavy armor only passed an economic efficiency test for use in very risky operations. Similarly, it is feasible to use the VSL to monetize the human costs of wars. The Vietnam War had a mortality cost of $114 billion, exceeding the $95 billion mortality cost of the post-9/11 wars. Because of the change in the capital-labor mix in military efforts, the percentage mortality cost share in the total costs of wars has declined from 13% in the Vietnam War to 5% for the post-9/11 wars.
The VSL plays no current role in regulatory enforcement. Agencies routinely use the VSL in setting the stringency of regulatory standards, but these agencies do not incorporate the VSL in setting damages for regulatory violations of these standards even when the violations lead to fatalities. This penalty structure is not the consequence of a failure by regulatory agencies to understand economic incentives. Rather, it emerges because the statutes governing risk regulation policies impose very low limits on permissible penalty amounts.
Typically, these statutes established penalty caps at the inception of the agency and have undergone periodic updates, primarily focusing on inflation. The Occupational Safety and Health Administration (OSHA) penalty caps were initially set at $1,000 for serious violations, including those related to fatalities. Increases in the cap subsequently boosted the amount to $13,260. However, this cap level is only about 0.1% of the estimated VSL. Food safety violations are subject to higher caps, but the population affected by fatal illnesses is often quite broad, making the caps very constraining. In 2017 the FDA had caps of $76,352 for any individual introducing adulterated food into interstate commerce and $763,515 for any series of violations in a single proceeding. As a result, large scale contamination events involving fatal illnesses from cantaloupe, meat, peanuts, and apple juice all incurred modest penalties despite a large number of fatalities in specific incidents.
The caps in place for transportation safety achieved particular prominence with respect to the GM ignition switch failures. With a statutory cap at that time of $35 million for a series of violations, the maximum penalty for 124 deaths, 275 injuries, and property damage to vehicles was limited to $35 million. Although the cap has since been increased to $105 million, it remains far too low for mass marketed, potentially defective consumer products.
Raising the cap on penalties that can be levied per fatality does not require that all sanctions equal the VSL, but it will provide enforcement efforts with more flexibility to impose sufficient penalties to promote efficient levels of safety. While businesses that have operations that kill workers or produce products that kill consumers have in some sense been unlucky that the risk lotteries turned out badly, the enforcement effort is not capricious. The penalties levied are also based on the identification of regulatory violations that led to these deaths.
Judicial proceedings also could profit from application of the VSL. Some economic experts have advocated the use of the VSL in setting damages amounts in routine wrongful death cases. In my view, more appropriate roles of the VSL are in ascertaining whether companies struck an appropriate risk-money tradeoff in their product safety investments and in setting total damages amounts in situations in which punitive damages are warranted. The VSL also could assist in providing the basis for monetizing fatalities, such as those from police shootings. Over the 2015-2018 period, the total mortality cost from fatal police shootings in the U.S. was $39.3 billion based on a $10 million VSL in that period. The distribution of these costs was $1.1 billion for victims who were unarmed and fleeing, $1.4 billion for victims who were unarmed and not fleeing, $9.6 billion for victims who are armed and fleeing, $23.6 billion of victims who were armed and not fleeing, and $3.7 billion for victims for whom their armed and fleeing status was not reported.
In these and other situations, the application of the VSL should be consistent with the underlying theoretical basis. When the task is to assess mortality costs and to assess the desirability of safety-related measures, the VSL is the appropriate guide. The fundamental role of the VSL in enabling society to strike an efficient balance between risks and costs is not restricted to agencies’ regulatory impact analyses.
1T.J. Kniesner, J.D. Leeth, and R.S. Sullivan. 2015. “A New Approach to Evaluate Safety and Force Protection Investments: The Value of a Statistical Life.” In Military Cost-Benefit Analysis: Theory and Practice, edited by F. Melese, A. Richter, and B. Solomon, 237-260. New York, NY: Routledge.