Coase-Sandor Working Paper Series in Law and Economics

Publication Date

2010

Publication Title

Law & Economics Working Papers

Abstract

When people face the risk of death, and when they ascribe no value to their wealth post-death, they over-invest in precautions in order to reduce that risk. There are two main reasons for such over-investment. First, people under risk of death discount their risk-reduction costs by the probability of death following precautions. Second, people facing the risk of death consider the consumption of their wealth when alive to be part of their benefit from risk-reduction. From a social perspective, people's wealth does not cease to exist after death. Therefore, discounting costs by the probability of death and taking into account the benefit of wealth-consumption are socially inefficient. But more interestingly, even from the perspective of the individual facing the risk of death, the investment in risk reduction is only optimal as a second-best alternative. We show that if people could contract with "reverse insurers", who would inherit their assets upon death while paying them a sum of money during their lifetimes, such contracts would make the insured individuals better off and, more importantly, would align the private and the social incentives to invest in risk reduction. Furthermore, we show how the insights developed in the paper should significantly change the application of "Willingness to Pay" (WTP) as a criterion for valuing life. In particular, we suggest that the WTP be discounted by the ex-post probability of death and that the value of life be determined irrespective of wealth. Finally, we argue that the results derived from traditional tort models for both unilateral and bilateral accidents should be substantially revised when applied to fatal accidents. In particular, we show that in bilateral accidents, contrary to conventional wisdom, negligence and strict liability rules lead to the same inefficient equilibrium. We also demonstrate how liability rules could be modified to increase efficiency.

Number

531

Included in

Law Commons

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