Over-reliance on the VSL measure often leads to excessive consideration and regulation of risk.
A life cannot be invested in an account, but the returns to capital investment that are created or displaced by government policies can. If compounding investment returns were properly accounted for in cost-benefit analysis (for example, using shadow prices rather than improperly using a social discount rate for this purpose), it is easy to see why many regulations could cost well in excess of $100 million-per-life saved at some point in the future. The simple reason is the power of compound interest. This $100 million figure happens to be the counterproductive cost-effectiveness threshold identified in W. Kip Viscusi’s (and my own) research.
Although opportunity cost may be an underutilized concept at federal regulatory agencies (and in academic research), this does not mean “no valid economic theory” supports its consideration in cost-benefit analysis. The value of a statistical life (VSL) treats compounding investment returns as equivalent to fleeting consumption. As such, reliance on it will often lead to excessive risk reduction in the present. That may well be in line with present preferences, but it is inefficient and can come at a cost of unnecessary loss of life in the future.
Ultimately, analysis should present a transparent accounting of the tradeoffs between present and future interests. Present use of the VSL stands in the way of that objective.
This discussion is part of a seven-part series, entitled The Value of the Value of a Statistical Life.