A life-cycle model of risk-taking on the job

Abstract

Behavioral studies suggest that individuals become more averse to taking risks as they age. Nevertheless, the incidence of fatal work injuries is increasing in age in the US and the EU. We develop a life-cycle model that rationalizes this pattern. We find that the decreasing value of life incentivizes higher risk-taking towards the end of a career and can potentially dominate an increasing preference for safer jobs. Calibrated to the US, our model generates a compensating wage differential and a trade-off between wealth and mortality, by which wealthier workers give up part of their wages in favor of lower mortality risk at the workplace. In a counterfactual analysis, we study the effect of pension reforms and aging on on-the-job mortality, finding that a higher retirement age as well as lower baseline mortality reduce risk-taking at all ages, while a higher pension replacement rate only benefits older workers.