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Employer-Provided Health Insurance and the Adverse Selection Problem

  • Marco A. Castaneda

    (Department of Economics, Tulane University, New Orleans, LA, USA)

  • James Marton


    (Department of Economics, Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA, USA)

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.

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Article provided by in its journal Public Finance Review.

Volume (Year): 41 (2013)
Issue (Month): 1 (January)
Pages: 3-36

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Handle: RePEc:sae:pubfin:v:41:y:2013:i:1:p:3-36
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