The Welfare Implications of Health Capital Investment

36 Pages Posted: 23 Oct 2010 Last revised: 28 Aug 2015

Sara B. Holland

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Date Written: July 31, 2014

Abstract

I present a model of the health capital investment decision of a firm using a moral hazard framework. Health capital investment increases the probability that a worker is present and productive. The firm cannot verify a worker's health capital investment decision. When a firm invests in health capital, the investment is verifiable because the firm contracts with the insurer. I derive the optimal contract for when the worker and for when the firm invests in health capital. When the firm invests in health capital, the level of investment is higher and wages are less volatile. In my model, firms invest more than workers because of a production externality and because it is less costly to invest in health capital than to compensate the worker for bearing the risk of an uncertain labor realization. This result improves welfare, contrary to the benchmark that workers consume more health care than is efficient ex post when firms provide health insurance. Unlike the benchmark model of a worker and insurer, my model includes a profit maximizing firm, includes an endogenous probability of getting sick, and allows the insurer to set premiums by anticipating the health care investment level of the insured.

Suggested Citation

Holland, Sara B., The Welfare Implications of Health Capital Investment (July 31, 2014). Available at SSRN: https://ssrn.com/abstract=1696008 or http://dx.doi.org/10.2139/ssrn.1696008

Sara B. Holland (Contact Author)

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

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