Employment-based health insurance and misallocation: Implications for the macroeconomy

Chivers, D.; Feng, Z.; Villamil, A.

Abstract

Most working-age Americans obtain health insurance through the workplace. U.S. law requires employers to use a common price, but the value of insurance varies with idiosyncratic health risk. Hence, linking employment and health insurance creates a wedge between the marginal cost and benefit of insurance. We study the impact of this wedge on occupational choice and welfare in a general equilibrium model. Agents face idiosyncratic health expenditure shocks, have heterogeneous managerial and worker productivity, and choose whether to be workers or entrepreneurs. First, we consider a private insurance indemnity policy that removes the link between employment and health insurance, so only ability matters for occupational choice. By construction, this is the most efficient policy. We find a welfare gain of 2.28% from decoupling health insurance and employment. Second, we tighten the link by increasing employment-based health insurance from the current U.S. level of 62% to 100%, and find a welfare loss of – 0.61%.

Citation

Chivers, D., Feng, Z., & Villamil, A. (2017). Employment-based health insurance and misallocation: Implications for the macroeconomy. Review of Economic Dynamics, 23, 125-149. https://doi.org/10.1016/j.red.2016.09.002

• Journal Article Type: Article
• Acceptance Date: Sep 3, 2016
• Online Publication Date: Sep 9, 2016
• Publication Date: Jan 1, 2017
• Deposit Date: Mar 15, 2017
• Publicly Available Date: Mar 9, 2018
• Journal: Review of Economic Dynamics
• Print ISSN: 1094-2025
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 23
• Pages: 125-149
• DOI: https://doi.org/10.1016/j.red.2016.09.002
• Public URL: https://durham-repository.worktribe.com/output/1390937