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Federal Subsidization and Optimal State Medicaid Provision

This paper quantifies the effect of federal subsidies on state Medicaid provision in the United States. The U.S. federal government matches each state at least one dollar for each dollar that the state spends on Medicaid. This subsidy creates an incentive for states to provide a more generous Medicaid program. We measure the effect of the subsidy by constructing a multi- regional, heterogeneous-agent, dynamic general equilibrium model with incomplete insurance markets and calibrating it to the U.S. economy. In the model, state governments take the federal subsidy as given and choose the Medicaid policy that maximizes the welfare of its citizens. We compare the results of the benchmark model to an economy with the subsidy removed and find that states rely almost entirely on the federal subsidy to finance their Medicaid programs.

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Paper provided by Department of Economics, Louisiana State University in its series Departmental Working Papers with number 2014-05.

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Handle: RePEc:lsu:lsuwpp:2014-05
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  1. Mariacristina De Nardi & Eric French & John B. Jones, 2010. "Why Do the Elderly Save? The Role of Medical Expenses," Journal of Political Economy, University of Chicago Press, vol. 118(1), pages 39-75, 02.
  2. Pashchenko, Svetlana & Porapakkarm, Ponpoje, 2012. "Quantitative analysis of health insurance reform: separating regulation from redistribution," MPRA Paper 41193, University Library of Munich, Germany.
  3. Conesa, Juan Carlos & Kitao, Sagiri & Krueger, Dirk, 2006. "Taxing capital? Not a bad idea after all!," CFS Working Paper Series 2006/21, Center for Financial Studies (CFS).
  4. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
  5. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December.
  6. Cutler, David M & Gruber, Jonathan, 1996. "Does Public Insurance Crowd Out Private Insurance?," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 391-430, May.
  7. Bordignon, Massimo & Manasse, Paolo & Tabellini, Guido, 1996. "Optimal Regional Redistribution Under Asymmetric Information," CEPR Discussion Papers 1437, C.E.P.R. Discussion Papers.
  8. Jerome Adda & Russell W. Cooper, 2003. "Dynamic Economics: Quantitative Methods and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012014, August.
  9. Svetlana Pashchenko & Ponpoje Porapakkarm, 2012. "Online Appendix to "Quantitative Analysis of Health Insurance Reform: Separating Regulation from Redistribution"," Technical Appendices 11-70, Review of Economic Dynamics.
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