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Employment-based Health Insurance and Misallocation: Implications for the Macroeconomy

Listed author(s):
  • David Chivers

    (Durham University)

  • Zhigang Feng

    (University of Nebraska)

  • Anne Villamil

    (University of Iowa)

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 level of 62% to 100%, and find a welfare loss of - 0.61%. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2016.09.002
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 23 (2017)
Issue (Month): (January)
Pages: 125-149

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Handle: RePEc:red:issued:15-311
DOI: 10.1016/j.red.2016.09.002
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