Insights Dorothy Robyn Katherine Swartz Coeditors

Candidates for inclusion in the Insights section should be sent directly to Dorothy Robyn, Joint Economic Committee, Dirksen Senate Office Building, Washington, D.C. 20510.

NERVOUS NELLIES AND DANGEROUS DANS

David Hemenway

Should motorists be required to buckle up? Should motorcyclists be forced to wear helmets? Should landlords be required to install smoke detectors? These policy issues are controversial. There may be no “correct” answer concerning the appropriateness of such mandatory safety regulations. There are many arguments on both sides of the debate. For example, while such legal requirements may reduce injury, they also typically limit individual liberty and freedom of choice.

Two well-known and related reasons for safety regulations are the existence of externalities and moral hazard. An externality can occur if a person’s failure to take safety precautions reduces the health or safety of others. Moral hazard can occur if insurance insulates an individual from the true cost of accidents. If moral hazard and/or externalities are present, the individual may not sufficiently take the costs of carelessness into account, and therefore may not take sufficient care. By requiring the individual to exert care, regula- tions can help restore behavior to the social optimum.

This article does not discuss all the pros and cons of safety legislation. Instead my intent is to introduce two related concepts into the debate-con- cepts that tend to support mandatory safety regulations. The concepts, termed selective recruitment and propitious selection, are based on differences among individuals in their preference for risk.

Selective Recruitment

Assume that individuals have different tastes for risk. At the extremes are the Nervous Nellies, who are highly risk-avoiding, and the Dangerous Dans,

Journal of Policy Analysis and Management, Vol. 12, No. 2, 359-363 (1993) 0 1993 b the Association for Public Policy Analysis and Management Publisheiby John Wiley & Sons, Inc. CCC 0276-87391931020359-05

360 Nervous Nellies and Dangerous D a m

who are risk-prone. Nervous Nellies take all sorts of safety precautions; Dan- gerous Dans take few. What type of motorists wear their seat belts? Under the above assumptions, the risk-avoiding individuals will tend both to wear their belts and to drive cautiously, while the risk-seekers will tend to do neither .’

The empirical evidence supports the notion that Nervous Nellies and Dan- gerous Dam act differently from each other. Seat belt use has been studied extensively [Evans, Wasielewski, and von Buseck, 1982; Evans and Wasielew- ski, 1983; Evans, 1987; Mayaset al., 1983; Pernegerand Smith, 1991; Preusser, Williams, and Lund, 19911. The evidence shows that belted motorists are less risky drivers than unbelted motorists. Belt wearers are less likely to tailgate and to drive drunk; they are less likely to commit traffic violations and to be involved in traffic accidents.

Studies also support the idea that safety belt users are risk-avoiders, not only as motorists, but also in other situations. For example, frequent belt users are less likely to smoke and more likely to exercise and visit the dentist regularly [Jonah and Lawson, 1986; Lichtenstein, Bolton, and Wade, 19891.

In the 1970s and early 1980s, belt usage rates in the United States averaged about 14 percent. In late 1984 New York passed the first mandatory seat belt law; now the vast majority of Americans reside in states with such laws, and usage rates have risen to almost 50 percent. The newly belted motorists tend to be below average risks [Evans, 19851. Evans labeled the process by which safer-than-average drivers switched to wearing seat belts “selective re- cruitment.”

The Nervous Nellies seem to be the first to wear their seat belts. Additional drivers recruited to wearing belts tend to be the safer ones from the pool of previously unbelted drivers. The drivers most at risk for injury are among the last to buckle up. Put another way, increasing belt usage appears likely to reduce serious injury and fatality at ever-increasing rates.

Selective recruitment has clear policy relevance. It means that raising belt usage from 0 to 50 percent will have less impact on injury reduction than if 50 percent of motorists chosen at random become wearers. It also implies that increasing usage rates from 50 to 100 percent will more than double the lives saved by seat belt use.

Propitious Selection

A phenomenon related to selective recruitment has been noted in the insur- ance field and has been labeled “propitious selection” [Hemenway, 19901. The theory assumes that people have different tastes for risk. Consider a simple model in which an individual can purchase a safety device and/or an

I However, some forces work in the opposite direction; they may lead some Dangerous Dans to buckle up and some Nervous Nellies to drive less carefully. For example, individuals who are hazardous drivers should derive more benefit from buckling up, and thus, ceteris paribus, be more prone to do so. Similarly, according to the theory of risk compensation [Peltzman, 19751, once an individual buckles up, the expected injury severity from a collision decreases, and the motorist may drive more recklessly.

Some of the safety benefits of regulations that increase seat belt use might be dissipated if newly belted motorists begin to drive less cautiously. While the effects of risk compensation can be substantial in many circumstances [Evans, 1985; Hemenway, 19931, direct observational studies following the imposition of mandatory seat belt laws have found no evidence of increased risk taking [Evans and Wasielewski, 1983; Lund and Zador, 19841.

Nervous Nellies and Dangerous Dans / 36 4

insurance contract; owning the safety device does not alter the insurance premium. The theory suggests that very risk-averse individuals (Nervous Nellies) will tend to purchase both the safety device and the insurance. Risk- prone individuals (the Dangerous Dans) will tend to purchase neither.

Many factors influence the relationship between risk taking and insurance purchase. Two that work against the force of propitious selection are adverse selection and moral hazard.

The price of insurance is often based on an average rate for an entire class. Within each class, some potential insureds will be better-than-average risks while others are worse than average. The people who know they are worse than average will be most likely to desire the insurance contract. This is the adverse selection problem [Akerlof, 19701.

Once a person purchases insurance, some of the possible losses will be reimbursed by the insurance company. Since insured individuals do not bear the full consequence of a calamity, they have less incentive to take precautions. This is the ex ante moral hazard problem [Pauly, 19681.

The implication of adverse selection is that once individuals buy the safety device, ceteris paribus, they become less likely to buy the insurance. Moral hazard suggests that once they buy the insurance, they become less likely to purchase the safety device. For any individual, the safety device and the insurance are partial substitutes. By contrast, propitious selection suggests that the individuals who purchase the safety device are likely to be risk- avoiders and thus are likely to purchase the insurance.

Whether the forces for propitious selection are stronger than the opposing forces is an empirical question. In many instances they seem to be. For example, an analysis of seat belt use in Iowa found that, among injured motorists, those who were belted were more likely to be medically insured [Nelson et al., 19931.

Another investigation found that individuals who never drink and drive are more likely than other motorists to be covered by motor vehicle liability insurance [Hemenway, 19921. Differences in preference for risk, rather than in income levels, probably account for the relationship: While higher income motorists are more likely to be insured, they are also more likely to drink and drive. Holding constant income, education, age, and other factors, the individuals who are risk-avoiders-that is, those who have yearly medical checkups, avoid food additives, carefully monitor their levels of alcohol in- take, and do not smoke-are more likely to purchase the liability coverage.

Of course, there are other possible explanations for these findings. For example, insurers may effectively market their policies toward low-risk indi- viduals, or experience rating may eventually lead to higher premiums for the more risk-prone. An explanation consistent with propitious selection is that risk-takers (Dangerous Dans) practice denial, and buying insurance would be an admission that the risk is a real one.

The theories of selective recruitment and propitious selection argue that those most at risk for injury or loss are often the least likely either to take physical precautions or to obtain financial protection. These theories have policy relevance; the case of motorcycle helmet laws provides an example.

Motorcycling is an extremely dangerous method of travel. As the saying goes: Buy your son a motorcycle for his last birthday. Motorcycling is very hazardous even with a helmet, but wearing a helmet does substantially reduce the risk of death and serious injury [Graham and Lee, 19861.

The theory of selective recruitment suggests that the least safe cyclists

362 / Nervous Nellies and Dangerous Dam

will not wear helmets voluntarily. A recent study provides some confirming evidence: Only 16 percent of crashed motorcyclists with previous drug or alcohol convictions were helmeted, while 37 percent of thcse with no prior record wore their helmets [Shankar et al., 19921.

Propitious selection argues that motorcyclists, and particularly the unsafe ones, will be less likely than other motorists to be covered by insurance. The evidence also seems to substantiate this contention.

Health insurers do not charge higher premiums for motorcyclists, nor do they distinguish between helmeted and unhelmeted ones. Yet motorcyclists are far less likely than similarly aged automobile drivers to be medically insured, and unhelmeted motorcyclists are often less likely than helmeted ones to possess insurance coverage [Bach and Wyman, 1986; Brady, Szabo, Timmerman, et al., 1985; Lloyd, Lauderdale, and Betz, 1987; Rivara et al., 1988; Shankar et al., 19921. When a collision occurs, the medical care costs of unhelmeted cyclists vastly exceed the costs of helmeted ones [Shankar et al., 19921, and these costs often must be borne by taxpayers and other pre- mium payers.

In January 1992, California began requiring motorcyclists to wear helmets. Usage rates are expected to rise from around 50 percent to close to 100 percent [Insurance Institute for Highway Safety, 19921. The theories of selective re- cruitment and propitious selection provide some support for the new require- ments. Selective recruitment implies that the total injury-reducing benefits from helmet use will more than double. Propitious selection argues that, by forcing the Dangerous Dans to cycle helmeted, we will substantially reduce the external financial burden they currently impose on the Nervous Nellies.

DAVID HEMENWAY is Senior Lecturer in the Department of Health Policy and Management, Haward School of Public Health.

REFERENCES

Akerlof, George (1970), “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal o f Economics 84, pp. 488-501.

Bach, Bernard and Edwin Wyman, Jr. (19861, “Financial Charges of Hospitalized Motorcyclists at the Massachusetts General Hospital,” Journal of Trauma 26, pp. 343-347.

Brady, Timothy, Robert Szabo, and Laura Timmerman, et al. (1985), “Cost of Orthope- dic Injuries Sustained in Morotcycle Accidents,” Journal of the American Medical Association 254, pp. 2452-2453.

Evans, Leonard, P. Wasielewski, and C. R. von Buseck (1982), “Compulsory Seat Belt Usage and Drivers’ Risk-Taking Behavior,” Human Factors 24, pp. 41-48.

Evans, Leonard and P. Wasielewski (1983), “Risky Driving Related to Driver and Vehicle Characteristics,” Accident Analysis and Prevention 15 , pp. 121-136.

Evans, Leonard (1983, “Human Behavior Feedback and Traffic Safety,” Human Fac- tors 27, pp. 555-576.

Evans, Leonard (1987), “Belted and Unbelted Driver Accident Involvement Rates Compared,” Journal of Safety Research 18, pp. 137-144.

Evans, Leonard (19911, Tra@c Safety and the Driver (New York: Van Nostrand Reinhold).

Graham, John D. and Younghee Lee (1986), “Behavioral Response to Safety Regula-

Nervous Nellies and Dangerous D a m / 363

tion: The Case of Motorcycle Helmet-Wearing Legislation,” Policy Sciences 19, pp.

Hemenway, David (1990), “Propitious Selection,” Quarterly Journal ofEconomics 105,

Hemenway, David (1992), “Propitious Selection in Insurance,” Journal of Risk and

Hemenway, David (1993), “Risk Compensation,” in Prices and Choices, 3rd ed. (Lan-

Insurance Institute for Highway Safety (1992), Status Report (March 14), pp. 4-5. Lichtenstein, Michael J., A. Bolton, and C . Wade (1989), “Derivation and Validation

of a Decision Rule for Predicting Seat Belt Utilization,” Journal of Family Practice

Lloyd, Linda, Mary Lauderdale, and Thomas Betz (1987), “Motorcycle Deaths and Injuries in Texas: Helmets Made a Difference,” Texas Medicine 83, pp. 30-33.

Lund, Adrian and Paul Zador (1984), “Mandatory Seat Belt Use and Driver Risk Taking,” Risk Analysis 4, pp. 41-53.

Mayas, J. M. B., N. K. Boyd, M. A. Collins and B. I. Harris (1983), A Study of Demo- graphic, Situational, and Motivational Factors Affecting Restraint Use in Automobiles (Report DOT HS-806-407, U.S. National Highway Traffic Safety Administration).

Nelson, David E., Timothy D. Peterson, Terence L. Chorba, J. Devine Owen, and Jeffrey J . Sacks (in press), “Cost Savings Associated with Increased Safety Belt Use in Iowa, 1987-88,” Accident Analysis and Prevention.

Pauly, Mark V. (1968), “The Economics of Moral Hazard,” American Economic Review

Peltzman, Sam (1973, “The Effects of Automobile Safety Regulation,” Journal of Political Economy 83, pp. 677-725.

Perneger, Thomas and Gordon S. Smith (1991)’ “The Driver’s Role in Fatal Two-Car Crashes: A Paired ‘Case-Control’ Study,” American Journal o f Epidemiology 134, pp. 1138-1 145.

Preusser, David F., Allan F. Williams, and Adrian K. Lund (1991), “Characteristics of Belted and Unbelted Drivers,” Accident Analysis and Prevention 23, pp. 475-482.

Rivara, Frederick P., Barbara C. Dicker, Abraham B. Bergman, Ralph Dacey, and Clifford Herman (1988), “The Public Cost of Motorcycle Trauma,” Journal of the American Medical Association 260, pp. 221-223.

Shankar, Belavadi S., Ammen I. Ramzy, Carl A. Soderstrom, Patricia C. Dischinger, and Carl C. Clark (1992), “Helmet Use, Patterns of Injury, Medical Outcome and Costs among Motorcycle Drivers in Maryland,” Accident Analysis and Prevention

253-276.

pp. 1063-1069.

Uncertainty 5 , pp. 247-251.

ham, MD: University Press of America).

28, pp. 289-292.

68, pp. 531-537.

24, pp. 385-396.