The Simulation Model

Economists since Adam Smith have been interested in hedonic equilibrium, or how the characteristics of a good or service are related to its price. The interest encompasses both product markets, as typified by the automobile industry study of Griliches (1971), and labor markets, as in the study of worker safety and compensating wage differentials by Thaler and Rosen (1975). Econometric research summarized in Chapter 2 reveals the difficulty of estimating the hedonic equilibrium price function (Brown and Rosen 1982, Brown 1983, Epple 1987, and Kahn and Lang 1988). Theoretical research also demonstrates the impossibility of deriving an analytical solution for the hedonic equilibrium locus in the presence of uncertainty caused, for instance, by the possibility of a work-related accident or disease (Epple, p. 63). To overcome the limitations of existing econometric and theoretical research we developed a numerical simulation model capable of examining both th direct and the indirect effects of public policies geared toward improving workplace safety.