Moral Hazard in Workers' Compensation

Abstract

This paper uses longitudinal CPS data on a large sample of workers to estimate the determinants of participation in state workers’ compensation programs in the United States. The principal finding is that higher workers’ compensation benefits are associated with greater participation in the workers’ compensation program, after allowing for worker characteristics, state dummy variables and other aspects of the workers’ compensation law. Moreover, this result holds for both manufacturing and nonmanufacturing workers. Workers’ compensation benefits, however, have an insignificant effect on program participation for the sample of women. Overall, a 10% increase in benefits is associated with a 7.1% increase in program participation. In addition, the results show that the waiting period that is required before benefit payments begin has a substantial negative effect on participation in the workers’ compensation program. Finally, with the exception of unemployment insurance, there is little evidence that workers are comparatively more likely to participate in other social insurance programs while they are collecting workers’ compensation benefits.