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Statistical vs. Identified Lives in Benefit-Cost Analysis

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  • James K. Hammitt
  • Nicolas Treich
Abstract
Economic evaluation of projects involving changes in mortality risk conventionally assumes that lives are statistical, i.e., that risks and policy-induced changes in risk are small and similar among a population. In reality, baseline mortality risks and policy-induced changes in risk often differ among individuals although these differences are imperfectly known. We examine the effects of information about heterogeneity of risk on economic evaluation. Although social welfare (defined as aggregate expected utility) is unaffected by information about risk heterogeneity, the economic valuation of changes in risk (the sum of individual compensating or equivalent variations) is sensitive to this information. The effect of information on economic valuation and hence the outcome of a benefit-cost analysis (BCA) depends on: i) whether information is about heterogeneity of the baseline and/or change in risk, ii) whether risk is valued using willingness to pay (WTP) or willingness to accept (WTA) measures, iii) the status quo policy, and iv) whether individuals are risk-averse or risk-neutral in wealth. We show that BCA does not systematically favor identified over statistical lives and suggest some political factors that may explain the apparent public-decision bias toward protecting identified lives.

Suggested Citation

  • James K. Hammitt & Nicolas Treich, 2007. "Statistical vs. Identified Lives in Benefit-Cost Analysis," CESifo Working Paper Series 1931, CESifo.
    • Handle: RePEc:ces:ceswps:_1931
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    Cited by:

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    6. Henrik Andersson & Nicolas Treich, 2011. "The Value of a Statistical Life," Chapters, in: André de Palma & Robin Lindsey & Emile Quinet & Roger Vickerman (ed.), A Handbook of Transport Economics, chapter 17, Edward Elgar Publishing.
    7. Adler, Matthew & Hammitt, James & Treich, Nicolas, 2012. "The Social Value of Mortality Risk Reduction: VSL vs. the Social Welfare Function Approach," LERNA Working Papers 12.08.365, LERNA, University of Toulouse.
    8. Hammitt, James K., 2020. "Accounting for the distribution of benefits & costs in benefit-cost analysis," TSE Working Papers 20-1116, Toulouse School of Economics (TSE).
    9. Lisa A. Robinson & James K. Hammitt, 2013. "Behavioral economics and the conduct of benefit–cost analysis: towards principles and standards," Chapters, in: Scott O. Farrow & Richard Zerbe, Jr. (ed.), Principles and Standards for Benefit–Cost Analysis, chapter 10, pages 317-363, Edward Elgar Publishing.
    10. Brown, Zachary Steven, 2022. "Distributional policy impacts, WTP-WTA disparities, and the Kaldor-Hicks tests in benefit-cost analysis," Journal of Environmental Economics and Management, Elsevier, vol. 113(C).
    11. H. Spencer Banzhaf, 2014. "Retrospectives: The Cold-War Origins of the Value of Statistical Life," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 213-226, Fall.
    12. Treich, Nicolas, 2010. "The value of a statistical life under ambiguity aversion," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 15-26, January.
    13. Foudi, Sébastien & Spadaro, Joseph V. & Chiabai, Aline & Polanco-Martínez, Josué M. & Neumann, Marc B., 2017. "The climatic dependencies of urban ecosystem services from green roofs: Threshold effects and non-linearity," Ecosystem Services, Elsevier, vol. 24(C), pages 223-233.
    14. Maureen Cropper & James K. Hammitt & Lisa A. Robinson, 2011. "Valuing Mortality Risk Reductions: Progress and Challenges," Annual Review of Resource Economics, Annual Reviews, vol. 3(1), pages 313-336, October.
    15. Adler, Matthew D. & Hammitt, James K. & Treich, Nicolas, 2014. "The social value of mortality risk reduction: VSL versus the social welfare function approach," Journal of Health Economics, Elsevier, vol. 35(C), pages 82-93.
    16. Carl F. Cranor & Adam M. Finkel, 2018. "Toward the usable recognition of individual benefits and costs in regulatory analysis and governance," Regulation & Governance, John Wiley & Sons, vol. 12(1), pages 131-149, March.
    17. St-Amour, Pascal, 2024. "Valuing life over the life cycle," Journal of Health Economics, Elsevier, vol. 93(C).
    18. Christoph Rheinberger, 2011. "A Mixed Logit Approach to Study Preferences for Safety on Alpine Roads," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 49(1), pages 121-146, May.
    19. Mario Andres Fernandez & Douglas Shaw, 2013. "Willingness to pay for intervention policies related to HIV/AIDS: a theoretical framework with endogenous risk, perceived effectiveness and altruism," Economics Bulletin, AccessEcon, vol. 33(2), pages 1457-1467.
    20. Courard-Hauri David & Lauer Stephen A., 2012. "Taking "All Men Are Created Equal" Seriously: Toward a Metric for the Intergroup Comparison of Utility Functions Through Life Values," Journal of Benefit-Cost Analysis, De Gruyter, vol. 3(3), pages 1-30, August.
    21. Christoph M. Rheinberger & Nicolas Treich, 2017. "Attitudes Toward Catastrophe," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(3), pages 609-636, July.
    22. James K. Hammitt & Peter Morfeld & Jouni T. Tuomisto & Thomas C. Erren, 2020. "Premature Deaths, Statistical Lives, and Years of Life Lost: Identification, Quantification, and Valuation of Mortality Risks," Risk Analysis, John Wiley & Sons, vol. 40(4), pages 674-695, April.
    23. Branden B. Johnson & Adam M. Finkel, 2023. "Sensitivity to scope in estimating the social benefits of prolonging lives for regulatory decisions using national stated preference tradeoffs," Environment Systems and Decisions, Springer, vol. 43(3), pages 509-528, September.
    24. Butts, Marcus M. & Lunt, Devin C. & Freling, Traci L. & Gabriel, Allison S., 2019. "Helping one or helping many? A theoretical integration and meta-analytic review of the compassion fade literature," Organizational Behavior and Human Decision Processes, Elsevier, vol. 151(C), pages 16-33.

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    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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