Workers' Compensation and Workplace Safety

Some Lessons from Economic Theory

by Richard A. Victor, Lisa R. Cohen, Charles E. Phelps

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This report uses the tools of economic theory to analyze how firms can be expected to respond to financial incentives. The report focuses on a statement that is usually assumed to be true and is repeated as conventional wisdom by many policymakers and the researchers who advise them: Increasing Workers' Compensation (WC) benefits induces a firm to increase safety. This report presents the results of a theoretical analysis of how WC financial incentives influence the safety decisions of rational profit-maximizing firms. The research suggests that although the common wisdom has a strong theoretical basis in many cases, it does not have it in all cases, and the empirical evidence fails to provide much support for it. The analysis explores the conditions under which increasing WC benefits may enhance, diminish, or leave unaffected employers' investments in safety.

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