Willingness to Pay and the Distribution of Risk and Wealth

The normative criterion for spending on risk reduction is what a rational, albeit uninsured, individual confronting lotteries on future risks to life and wealth would choose for himself, which requires correcting WTP to eliminate the dead-anyway effect but continues to reflect that wealth enhances the utility of living.

Abstract

Willingness-to-pay is an appropriate benefits metric for government expenditure and regulatory policies that reduce risks to human life. It depends, however, on the distribution of risk and wealth. Currently, society's expenditures overemphasize concentrated risks, say after-the-fact treatment as opposed to prevention. A 'dead-anyway' effect complements excess attention to intense interests in explaining this. The normative criterion for spending on risk reduction is what a rational, albeit uninsured, individual confronting lotteries on future risks to life and wealth would choose for himself. This requires correcting willingness-to-pay to eliminate the dead-anyway effect but continues to reflect that wealth enhances the utility of living. Copyright 1996 by University of Chicago Press.