The Utility Analysis of Choices Involving Risk: Some Implications for Hedonic Damages

214 p.Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 1993.The economic theory of tort has been dominated by an ex post perspective. Researchers have tended to think about the ways in which accident costs could be allocated among parties to provide each with incentives to undertake efficient levels of precaution. In this thesis, it is argued that the focus on accident costs is not generally proper. It happens to be appropriate in a special case when the cost of bearing risk equals the value of a potential accident times the probability of incurring the loss. More generally, it is the value of risk bearing, not the value of losses, that is pertinent to choices over the allocation of resources. Once this is recognized, it becomes clear that the hedonic value-of-life should not be interpreted as a measure of ex post accident costs. Rather, the hedonic value-of-life is an attempt to calculate a remedy that will cause the potential tort-feasor to associate with behaviors that engender risk costs that reflect the amount that fully informed potential victims would require in order to willingly bear those risks. The scope of the analysis is restricted to situations characterized by unilateral damages and unilateral precautionary technology. The theory developed suggests that the remedy that is perfectly efficient with respect to deterrence will vary with the magnitude of the risk increment created by the tort-feasor's activities. Because, as currently practiced, the hedonic value-of-life does not specifically depend upon the magnitude of the risk created by the tort-feasor and because it may be too costly to cause it to do so, the magnitude of the error arising from using a single hedonic value-of-life over a range of probability increments is estimated. Using simulations constructed from a Friedman-Savage type state-dependent utility of wealth framework and given moderate assumptions, it is estimated that the error arising specifically from this source is likely to be acceptable for the cases that would be adjudicated under tort rather than criminal law.U of I OnlyRestricted to the U of I community idenfinitely during batch ingest of legacy ETD