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Employer-Provided Health Insurance and the Adverse Selection Problem


  • Marco A. Castaneda
  • James Marton


The role of employers in the health insurance market in the United States is substantial, but there is little formal analysis investigating how the introduction of employers affects the structure of equilibrium contracts in the health insurance market. In this article, the authors present and analyze a model of employer-provided health insurance and show that if the labor market is competitive, the equilibrium must be a separating equilibrium, as in the standard model. The key to this result is that insurance companies and employers have similar incentives because health insurance is an important component of total compensation. In addition, the authors show that if workers bargain collectively for employment contracts, the equilibrium can be a separating or a pooling equilibrium, but in any equilibrium, the low risks obtain more insurance than in the standard model and subsidize the insurance premiums of the high risks.

Suggested Citation

  • Marco A. Castaneda & James Marton, 2013. "Employer-Provided Health Insurance and the Adverse Selection Problem," Public Finance Review, , vol. 41(1), pages 3-36, January.
  • Handle: RePEc:sae:pubfin:v:41:y:2013:i:1:p:3-36

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    References listed on IDEAS

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    4. Edward N. Wolff & Ajit Zacharias, 2007. "The Distributional Consequences Of Government Spending And Taxation In The U.S., 1989 And 2000," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 53(4), pages 692-715, December.
    5. Lerman, Robert I. & Yitzhaki, Shlomo, 1995. "Changing Ranks and the Inequality Impacts of Taxes and Transfers," National Tax Journal, National Tax Association, vol. 48(1), pages 45-59, March.
    6. Ivica Urban & Peter J. Lambert, 2008. "Redistribution, Horizontal Inequity, and Reranking: How to Measure Them Properly," Public Finance Review, , vol. 36(5), pages 563-587, September.
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    Cited by:

    1. Ines Läufer, 2014. "Das Krankenversicherungssystem in den USA: Bestimmungsparameter des Angebots und der Ausgestaltungformen von Arbeitgeber-Gruppenversicherungen," Otto-Wolff-Institut Discussion Paper Series 03/2014, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.


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