Abstract
If workers have imprecise, but unbiased risk perceptions, they will accept a lower wage and less of a marginal wage reduction in response to an increase in injury compensation or a reduction in risk. Market outcomes will provide too little compensation and too great a job risk, as compared with the perfect information case. The optimal workmen's compensation policy will provide a supra-optimal benefit level in an effort to create incentives for safety. The signaling function of market-provided injury compensation will eliminate the bias in worker priors and increase their precision, eliminating the market failure in some instances.
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