Taking Precautions under Risk of Death

When individuals 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 those risks. There are two main reasons for such over-investment. First, people under risk of death discount their (marginal) 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 as part of their benefit from risk-reduction. From a social perspective people's wealth does not extinguish 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 risk of death, the investment in risk reduction is only optimal as a second-best alternative. We show that if individuals could contract with "reverse insurers", that would inherit their assets upon death, while paying them a sum of money during their life, such contract would increase the expected utilities of the insured individuals. 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 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, contrary to conventional wisdom, we show that in bilateral accidents, negligence and strict liability rules lead to the same inefficient equilibrium. We also demonstrate how liability rules could be modified to improve efficiency