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American Economic Review: Vol. 101 No. 7 (December 2011)

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Dynamic Inefficiencies in an Employment-Based Health Insurance System: Theory and Evidence

Article Citation

Fang, Hanming, and Alessandro Gavazza. 2011. "Dynamic Inefficiencies in an Employment-Based Health Insurance System: Theory and Evidence." American Economic Review, 101(7): 3047-77.

DOI: 10.1257/aer.101.7.3047

Abstract

We investigate the effects of the institutional settings of the US health care system on individuals' life-cycle medical expenditures. Health is a form of general human capital; labor turnover and labor-market frictions prevent an employer-employee pair from capturing the entire surplus from investment in an employee's health. Thus, the pair underinvests in health during working years, thereby increasing medical expenditures during retirement. We provide empirical evidence consistent with the comparative statics predictions of our model using the Medical Expenditure Panel Survey (MEPS) and the Health and Retirement Study (HRS). Our estimates suggest significant inefficiencies in health investment in the United States. (JEL D14, D91, G22, I11, J32)

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Authors

Fang, Hanming (U PA)
Gavazza, Alessandro (NYU)

JEL Classifications

D14: Personal Finance
D91: Intertemporal Consumer Choice; Life Cycle Models and Saving
G22: Insurance; Insurance Companies
I11: Analysis of Health Care Markets
J32: Nonwage Labor Costs and Benefits; Private Pensions


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