Compensation for risk

There are two ways workers can be compensated for risk on the job. They can receive compensation in advance ex ante) for taking on the risk, before they know whether or not they will actually be hurt. They can also be compensated after the fact (ex post), in which case only those workers who suffered injuries or illnesses (or their estates) will receive the extra money. These two forms of compensation serve the same functions, equity and efficiency, and workers should be generally indifferent over which form is adopted. To see this more clearly, let us return to our simplified world in which workers are equivalent in all respects, labor markets are competitive, and jobs differ only with respect to the risk of an accident. The utility a worker derives from a job can be represented as... 

By themselves, these books provide disquieting evidence against the existence of wage compensation for risk. Still, they might be understood as products of a period in which the classical, Smithian theory was in eclipse. Recall that, by the turn of the twentieth century, intellectual currents had drifted away from the view that markets automatically compensate workers for risk on the job, and this was even true for the economic giants of that period, such as Marshall and Jevons. There is little positive mention of Smith s theory in the economic literature... 

Safety may also improve for three other reasons. First, WC increases the cost of labor relative to capital, thereby reducing employment and workplace injuries. Second, if WC benefits are related to pre-injury wages then firms improve safety to minimize the cost of purchasing the insurance necessary to cover the wage compensation for risk. Specifically, if b—iw where i is a constant exceeding zero, equation (2.6) (the condition for the firm s optimal level of safety) becomes... 

To examine the importance of our initial assumptions we decreased the value of each parameter by 1 percent, holding all other parameters constant, and calculated the percentage change in the wage and the compensation for risk at each level of workplace safety. Table 3-3 presents the results of our sensitivity checking exercise as impact elasticities calculated from the continuous version of the hedonic model. 

Table 3-3. Sensitivity Checks Wage and Compensation for Risk Elasticities... 

Note Table 3-1 lists the functions and parameter values used in the simulations. Except for the parameter under investigation, all parameters were set at initial values. Elasticities were calculated using 1 percent decreases in the initial values. To determine the nonlabor income elasticities, we examined a 1 percent decrease in3 from 1,000 ( 1,000 represents approximately 10 percent of a worker s wage income). The wage and compensation for risk elasticities for v, 5, y, total number of workers, and total number of establishments were less than 0.(X)1 and 0.035, respectively, at all injury probabilities. 

Empirical research concerning the shape of the hedonic wave function is limited. The one study directly examining the wage function s shape found the function to be concave in injury risk. Further, the percentage decrease in the compensation for risk from safe to relatively hazardous jobs is approximately the same as we calculated (Leigh and Folsom 1984). 

Alert, well-trained clinicians create safety every day through recognizing and compensating for risks in the workplace. 

Every day, health care professionals at the sharp end create safety by compensating for risk-prone conditions. Predicting and preventing those risk-prone conditions is the goal of the zone strategy. Katharine Luther, director of performance improvement at Memorial Hermann Healthcare System, Houston, created the zone strategy to predict when conditions exist that have the potential to overwhelm a team s ability to protect patients. 

At this point it can be seen what the risk compensation theory should express it is possible to compensate for risks arising from human defects through the will to achieve safety. Indeed many elderly people are very careful to conserve the faculties still left to them and thus remain fully... 

How can government develop a general risk policy in which it plays a smaller role in avoiding and compensating for risks ... 

The most common of all the motivations considered by driving researchers is risk the minimization of risk or the compensation for risk. The minimization models assume that we do not drive to maximize safety, but we drive to minimize risk. An early approach offered by Naatanen and Summala (1976) and later revised by Summala (1985, 1988) argued that drivers adjust their driving in order to maintain a zero-risk level. In other words, most drivers behave as if most of the time there is no risk at all (a perception often not shared by their passengers Dillon and Dunn, 2005). To modify the driving, the perceived risk has to exceed the zero level by some threshold amount. Thus, most of the time drivers are assumed to be driving with a perceived level of zero risk - more or less. Only when that level is seriously compromised do they change their behavior. 

The credit rating of a company is a major determinant of the yield that will be payable by that company s bonds. The yield spread of a corporate bond over the risk-free bond yield is known as the default premium. In practice, the default premium is composed of two elements, the compensation element specific to the company and the element related to market risk. This is because, in an environment where the default of one company was completely unrelated to the default of other companies, the return from a portfolio of corporate bonds would equal that of the risk-free bond. The gains from bonds of companies that did not default compensated for the loss from those that did default. The additional part of the default premium, the risk premium, is the compensation for risk exposure that cannot be diversified away in a portfolio, known as systematic or non-diversifiable risk. Observation of the market tells us that in certain circumstances, the default patterns of companies are related for example, in a recession there are more corporate defaults, and this fact is reflected in the risk premium. 

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