Game Theory and Business Strategy

In part because of the differing amounts that firms invest in safety, jobs in some firms are more dangerous than in others. Thousands of U.S. workers are killed on the job every year—5,190 in 2016 or about 14 per day.

Major disasters have occurred in many countries. An apparel factory collapse in Bangladesh killed 1,129 workers in 2013. A warehouse explosion in the port of Tianjin, China, in 2015 killed over 100 workers. In 2017, a power plant explosion in Unchahar, India, killed 38 workers and seriously injured about 100 others. The International Labor Organization estimates that over two million workers die in industrial accidents or due to work-related illnesses every year.

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Managers at each firm must decide how much to invest in worker safety. Such investments affect the firm’s own reputation for safety, but may also affect how safe workers believe they are at other firms in the industry. Recent U.S. workplace accidents have resulted in renewed calls by unions for greater U.S. government intervention to protect workers, which would affect all firms.

One justification that is often given for government intervention is that firms have more information than workers about job safety at their plants. Prospective employees often do not know the injury rates at individual firms but may know the average injury rate over an entire industry from government reports or other sources.

Injury rates vary dramatically by industry. In 2016, the U.S. financial services industry, the safest industry, had a rate of only 0.4 fatal injuries per 100,000 workers. Other safe industries include health care (0.7) and education (1.07—although students risk dying of boredom). Construction (10.1), mining (10.1), agriculture (20.9), and truck driving (25.6) are much more dangerous. The most dangerous industries are fishing, hunting, and trapping (69.1) and logging


If people are rational and fear danger, they agree to work in a dangerous job only if that job pays a sufficiently higher wage than less risky alternative jobs. Economists have found that workers receive compensating wage differentials in industries and occupations that government statistics show are relatively risky.

However, if workers are unaware of the greater risks at certain firms within an industry, they may not receive compensating wage differentials from more dangerous employers within that industry. Workers are likely to have a sense of the risks associated with an industry: Everyone knows that mining is relatively risky—but they do not know which mining companies are particularly risky before a major accident occurs. For example, in the decade before Massey Energy was acquired by Alpha Natural Resources in 2011, 54 coal miners were killed in Massey mines, a much higher rate than at other mines, yet there’s no evidence that these workers received higher pay than workers at other mining firms.[2]

Because workers do not know which firms are safer than others, each firm bears the full cost of its safety investments but does not get the full benefits. If workers are aware of the average risk in an industry, all firms benefit from one firm’s safety investment because that investment improves the industry average. Thus, other firms share the benefit from one firm’s investment in safety. Consequently, managers, when making the important strategic decision of how much their firms should invest in safety, must take this spillover effect into account.

Does such a situation cause firms to underinvest in safety? Can government intervention overcome such safety problems?

[1] Government statistics also tell us that males have a fatal accident rate, 5.8, that is an order of magnitude greater than that of females, 0.6. Some of this difference is due to different occupations and some to different attitudes toward risk.

[2] The U.S. Mine Safety and Health Administration issued Massey 124 safety-related citations in 2010 prior to the April 2010 accident at Massey’s Upper Big Branch mine in West Virginia that killed 29 workers. Massey had 515 violations in 2009. Mine Safety and Health Administration safety officials concluded in 2011 that the 2010 explosion that took 29 lives could have been prevented by Massey. The former head of security at the mine was prosecuted and convicted of two felonies and ultimately sentenced to 36 months in prison.

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