Contracting with Limited Commitment: Evidence from Employment-Based Health Insurance Contracts

Syracuse University Center for Policy Research Working Paper No. 45

60 Pages Posted: 15 Apr 2011

See all articles by Keith J. Crocker

Keith J. Crocker

Penn State University - Smeal College of Business

John R. Moran

Penn State University

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2002

Abstract

When an individual’s health status is observable, but evolving over time, the key to maintaining a successful health insurance arrangement is to have the healthier members of the group cross-subsidize those who experience adverse health outcomes. We argue that impediments to worker mobility may serve to mitigate the attrition of healthy individuals from employer-sponsored insurance pools, thereby creating a de facto commitment mechanism that allows for more complete insurance of health risks than would be possible in the absence of such frictions. Using data on health insurance contracts obtained from the 1987 National Medical Expenditure Survey, we find that the quantity of insurance provided, as measured by lifetime limits on benefits and annual stop-loss amounts, is positively related to the degree of worker commitment. These results illustrate the importance of commitment in the design of long-term contracts, and provide an additional rationale for the practice of bundling health insurance with employment.

JEL Classification: H11, J6

Suggested Citation

Crocker, Keith J. and Moran, John R., Contracting with Limited Commitment: Evidence from Employment-Based Health Insurance Contracts (July 1, 2002). Syracuse University Center for Policy Research Working Paper No. 45. Available at SSRN: https://ssrn.com/abstract=1809853 or http://dx.doi.org/10.2139/ssrn.1809853

Keith J. Crocker (Contact Author)

Penn State University - Smeal College of Business ( email )

University Park, PA 16802
United States
814-863-0664 (Phone)
814-863-0664 (Fax)

John R. Moran

Penn State University ( email )

116 Henderson Bldg.
Penn State University
University Park, PA 16802
United States

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