Prevention Policy in an Uncertain Environment
Abstract
This paper investigates the case in which the benefits and the costs of prevention are subject to uncertainty. Prevention measures are taken after uncertainty has unraveled. The conventional policy prescribes that prevention measures are taken up to the point in which the realized marginal cost of prevention is equal to the realized marginal benefit (measured in terms of the Value of Statistical Lives saved). This policy imposes costly uncertainty on imperfectly insured parties. The optimal ex-ante policy mitigates this uncertainty. It deviates from the conventional policy by prescribing less prevention in those contingencies in which risk-preventers face high compliance costs and victims face a high probability of injury, and higher prevention in the opposite case. The optimal ex-ante policy supports the use of a VSL measure constant across contingencies. It dilutes the “dead-anyway” effect and it responds to the risk-preventers’ level of prudence.