Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
HAZARD COMPENSATION AND INCENTIVE SYSTEMS: AN ECONOMIC 151 PERSPECTIVE original typesetting files. Page breaks are true to the original; line lengths, word breaks, heading styles, and other typesetting-specific formatting, however, cannot be About this PDF file: This new digital representation of the original work has been recomposed from XML files created from the original paper book, not from the retained, and some typographic errors may have been accidentally inserted. Please use the print version of this publication as the authoritative version for attribution. bile trip (statistical data yield a figure of 1 fatal accident in 3.5 million person trips). However, demonstrating that this low probability compounds to a lifetime probability (based on 40,000 trips) of .01 might put the use of seat belts in a more favorable light. Slovic, Fischhoff, and Lichtenstein (1978) found in controlled laboratory experiments that most people did in fact respond more favorably to this lifetime probability than to a trip-by-trip statement of risk. However, it is not clear whether this way of presenting information would be effective in modifying people's behavior outside of the laboratory. Reducing Insurance Premiums Another way to induce individuals to recognize the potential benefits of protective activities is to focus on the immediate returns ex ante from taking action rather than on the reduction in losses should an accident occur. Insurance rates are a particularly appropriate indicator of what actions are worthwhile economically. In this spirit, Nationwide Insurance Company reduced its annual insurance premiums by $20 for cars with automatic seat belts. Nordhaus (1984) estimated that the present-value discounted savings from the additional expenditure for an automatic seat belt would be $124.00. It is an open question, however, whether individuals really calculate long- run savings and compare them with short-run expenditures. Automatic seat belts normally cost an extra $100 in a car, so the $20 savings in premiums may look inadequate if consumers think in terms of short-term balance sheets as Thaler (1983) and Kahneman and Tversky (1984) suggest. If this is true, then the obvious alternative is for insurance companies to offer large discounts ($50 to $60) in premiums at the time a car is bought and to reduce the discounts in subsequent years. Penalties and Fines Rather than providing positive incentives for adopting protective mechanisms, penalties can be imposed for those who do not make use of protective measures. For example, if residents of hazard-prone areas do not buy insurance, they could be held ineligible for federal disaster assistance. On the other hand, those with at least partial coverage could be permitted to take advantage of government aid. With respect to traffic safety problems, Austria has adopted a policy whereby insurance payments for medical expenses are contingent on the use of a seat belt, although it may be difficult to determine whether an accident victim has actually buckled up. This type of conditional ex post compensation will be successful only to the extent that people believe such a determi