Risk of Death

Abstract

When people face risk of death, they over invest in risk reduction: first, they discount their risk-reduction costs by the probability of death; second, they consider the consumption of their wealth as a benefit from risk reduction. From a social perspective, people’s wealth remains after their death.Therefore, discounting costs by the probability of death and taking into account the benefit of wealth consumption are socially inefficient. Moreover, even for the individual under risk of death, the investment in risk reduction is excessive. We discuss market mechanisms that could correct the inefficiencies; we argue that ‘‘willingness to pay’’ as a criterion for valuing life should radically change; and we show how the results of the economic analysis of tort law should be modified.