Publication detailsChivers, D., Feng, Z. & Villamil, A. (2017). Employment-based health insurance and misallocation: Implications for the macroeconomy. Review of Economic Dynamics 23: 125-149.
- Publication type: Journal Article
- ISSN/ISBN: 1094-2025
- DOI: 10.1016/j.red.2016.09.002
- Further publication details on publisher web site
- Durham Research Online (DRO) - may include full text
Author(s) from Durham
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%.