IDEAS home Printed from https://ideas.repec.org/a/red/issued/15-311.html
   My bibliography  Save this article

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

Author

Listed:
  • David Chivers

    (Durham University)

  • Zhigang Feng

    (University of Nebraska)

  • Anne Villamil

    (University of Iowa)

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

Suggested Citation

  • David Chivers & Zhigang Feng & Anne Villamil, 2017. "Employment-based Health Insurance and Misallocation: Implications for the Macroeconomy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 125-149, January.
  • Handle: RePEc:red:issued:15-311
    DOI: 10.1016/j.red.2016.09.002
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1016/j.red.2016.09.002
    Download Restriction: Access to full texts is restricted to ScienceDirect subscribers and institutional members. See http://www.sciencedirect.com/ for details.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Antunes, António & Cavalcanti, Tiago & Villamil, Anne, 2008. "Computing general equilibrium models with occupational choice and financial frictions," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 553-568, July.
    2. Marco Cagetti & Mariacristina De Nardi, 2006. "Entrepreneurship, Frictions, and Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 835-870, October.
    3. Hansen, Gary D. & Hsu, Minchung & Lee, Junsang, 2014. "Health insurance reform: The impact of a Medicare buy-in," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 315-329.
    4. Harold L. Cole & Soojin Kim & Dirk Krueger, 2012. "Analyzing the Effects of Insuring Health Risks: On the Trade-off between Short Run Insurance Benefits vs. Long Run Incentive Costs," PIER Working Paper Archive 12-047, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    5. Nezih Guner & Gustavo Ventura & Xu Yi, 2008. "Macroeconomic Implications of Size-Dependent Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 721-744, October.
    6. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-396, March.
    7. Craig Garthwaite & Tal Gross & Matthew J. Notowidigdo, 2014. "Public Health Insurance, Labor Supply, and Employment Lock," The Quarterly Journal of Economics, Oxford University Press, vol. 129(2), pages 653-696.
    8. Fairlie, Robert W. & Kapur, Kanika & Gates, Susan, 2011. "Is employer-based health insurance a barrier to entrepreneurship?," Journal of Health Economics, Elsevier, vol. 30(1), pages 146-162, January.
    9. Kolstad, Jonathan T. & Kowalski, Amanda E., 2016. "Mandate-based health reform and the labor market: Evidence from the Massachusetts reform," Journal of Health Economics, Elsevier, vol. 47(C), pages 81-106.
    10. Svetlana Pashchenko & Ponpoje Porapakkarm, 2013. "Quantitative Analysis of Health Insurance Reform: Separating Regulation from Redistribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 383-404, July.
    11. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-399, April.
    12. Thomas C. Buchmueller & Alan C. Monheit, 2009. "Employer-Sponsored Health Insurance and the Promise of Health Insurance Reform," NBER Working Papers 14839, National Bureau of Economic Research, Inc.
    13. Robert E. Hall & Charles I. Jones, 2007. "The Value of Life and the Rise in Health Spending," The Quarterly Journal of Economics, Oxford University Press, vol. 122(1), pages 39-72.
    14. Grossman, Michael, 1972. "On the Concept of Health Capital and the Demand for Health," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 223-255, March-Apr.
    15. Buera, Francisco J. & Shin, Yongseok, 2011. "Self-insurance vs. self-financing: A welfare analysis of the persistence of shocks," Journal of Economic Theory, Elsevier, vol. 146(3), pages 845-862, May.
    16. Jeske, Karsten & Kitao, Sagiri, 2009. "U.S. tax policy and health insurance demand: Can a regressive policy improve welfare?," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 210-221, March.
    17. Matthew S. Dey & Christopher J. Flinn, 2005. "An Equilibrium Model of Health Insurance Provision and Wage Determination," Econometrica, Econometric Society, vol. 73(2), pages 571-627, March.
    18. Iourii Manovskii & Bjoern Bruegemann, 2009. "Fragility: A Quantitative Analysis of the US Health Insurance System," 2009 Meeting Papers 1246, Society for Economic Dynamics.
    19. Fonseca, Raquel & Lopez-Garcia, Paloma & Pissarides, Christopher A., 2001. "Entrepreneurship, start-up costs and employment," European Economic Review, Elsevier, vol. 45(4-6), pages 692-705, May.
    20. Juergen Jung & Chung Tran, 2016. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 132-159, April.
    21. Antunes, António & Cavalcanti, Tiago & Villamil, Anne, 2008. "The effect of financial repression and enforcement on entrepreneurship and economic development," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 278-297, March.
    22. Zhigang Feng, 2009. "Macroeconomic Consequences of Alternative Reforms to the Health Insurance System in the U.S," Working Papers 0908, University of Miami, Department of Economics.
    23. Florian Scheuer, 2014. "Entrepreneurial Taxation with Endogenous Entry," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 126-163, May.
    24. Diego Restuccia & Richard Rogerson, 2013. "Misallocation and productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 1-10, January.
    25. Juergen Jung & Chung Tran, 2016. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 132-159, April.
    26. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 695-717, June.
    27. Panousi, Vasia, 2009. "Capital Taxation with Entrepreneurial Risk," MPRA Paper 24237, University Library of Munich, Germany.
    28. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
    29. Eric French & John Bailey Jones, 2004. "On the distribution and dynamics of health care costs," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 705-721.
    30. Stephen (Teng) Sun & Constantine Yannelis, 2016. "Quantifying The Premium Externality Of The Uninsured," Journal of the European Economic Association, European Economic Association, vol. 14(2), pages 405-437, April.
    31. Li, Wenli, 2002. "Entrepreneurship and government subsidies: A general equilibrium analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1815-1844, September.
    32. Neus Herranz & Stefan Krasa & Anne P. Villamil, 2015. "Entrepreneurs, Risk Aversion, and Dynamic Firms," Journal of Political Economy, University of Chicago Press, vol. 123(5), pages 1133-1176.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Anne Villamil & Zhigang Feng, 2017. "Regressive Subsidy to EHI and Entrepreneurial Talent Allocation," 2017 Meeting Papers 1059, Society for Economic Dynamics.

    More about this item

    Keywords

    Health insurance; Occupational choice; Entrepreneur; Misallocation; Uncertainty; Heterogeneity; Mandate; Patient protection; Affordable care act;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • I10 - Health, Education, and Welfare - - Health - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:issued:15-311. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.