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Valuing Risk in the Workplace: Market Price, Willingness to Pay, and the Optimal Provision of Safety

Henry W. Herzog, Jr. and Alan M. Schlottmann
The Review of Economics and Statistics
Vol. 72, No. 3 (Aug., 1990), pp. 463-470
Published by: The MIT Press
DOI: 10.2307/2109354
Stable URL: http://www.jstor.org/stable/2109354
Page Count: 8
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Valuing Risk in the Workplace: Market Price, Willingness to Pay, and the Optimal Provision of Safety
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Abstract

The theory of compensating wage differentials, attributable to Adam Smith, suggests that jobs with disagreeable characteristics will command high wages, ceteris paribus. Most empirical tests of this theory with hedonic wage equations implicitly assume that workers' willingness to pay for risk reduction (safety) in the workplace through diminished wages, and market valuations of the "price" of these reductions, are equivalent. It is shown that this is not the case within the manufacturing sector where willingness to pay exceeds the price (cost) of risk reduction at current levels of risk exposure. Implications for implied value of life estimates are also examined.

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