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Employment-based health insurance and misallocation: Implications for the macroeconomy

Chivers, D.; Feng, Z.; Villamil, A.

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Authors

Z. Feng

A. Villamil



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 U.S. level of 62% to 100%, and find a welfare loss of – 0.61%.

Citation

Chivers, D., Feng, Z., & Villamil, A. (2017). Employment-based health insurance and misallocation: Implications for the macroeconomy. Review of Economic Dynamics, 23, 125-149. https://doi.org/10.1016/j.red.2016.09.002

Journal Article Type Article
Acceptance Date Sep 3, 2016
Online Publication Date Sep 9, 2016
Publication Date Jan 1, 2017
Deposit Date Mar 15, 2017
Publicly Available Date Mar 9, 2018
Journal Review of Economic Dynamics
Print ISSN 1094-2025
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 23
Pages 125-149
DOI https://doi.org/10.1016/j.red.2016.09.002
Public URL https://durham-repository.worktribe.com/output/1390937

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