LABOR ECONOMICS HEDONIC THEORY

Labor Economics Hedonic Theory
Homework: Hedonic Theory
Assume
that there is a baseline risk of death on the job of q
0
percent annually. Firms can invest to
reduce this risk, so that actual risk at a job is q(
i
)=q
0

i
*ß.
Here i is amount invested
into reducing
the
risk
a given employee faces
.
Of course mortality is bounded below by 0, so the
maximum productive
amount that can be invested i
n reduci
ng mortality risk i
s i
Max
= q
0
/ß .
All firms produce the same good c
and this good has a price equal to 1.
All workers are equally productive and produce an output of
H
of
the consumption good.
Question 1
D
erive an expression of wages
w(q)
in this
economy that has to be satisfied by wage

risk combinations
that
competitive
firms would be willing to
offer to workers in equilibrium.
Question 2
Consider now individuals that have preferences over consumption and risk of death given by
(,)
Ucs
,
where
0
s
q
q
?
?
is “job safety” relative to base

line risk
0
q
.
Write down the maximization problem
that workers face
and illustrate the choice problem in a graph
in a two

dimensional graph with c and s
on the axes
.
Assume that the parameter values are such that the solution is in the interior (ie
0
sq
?
)
Question 3
Say
consumers preferences are such that a both c and s are normal goods. Assume furthermore that
individuals differ in
the
human capital
H
(but still everybody has
0
sq
?
)
.
Consider two individuals of
whom one has a higher level of H than the other. W
ho will earn higher wages and who will face greater
risk?
Will the two individuals differ in their Value of a Statistical L
ife (VSL)?
Question 4
Use your answer to question 3 to explain why it might be difficult
to empirically measure the VSL using
the relation between wages and risk.
SHORT, PRECISE, CLEAR, AND CORRECT ANSWERS RECEIVE FULL POINTS.

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