Buying Time

The Insurance Value and Distortionary Effects of Workers' Compensation

by Stephanie Rennane

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I examine the roles of moral hazard and increased liquidity in explaining the relationship between Workers' Compensation (WC) benefit levels and injury duration. Using a discrete proportional hazard model and exploiting variation in the timing and size of a retroactive lump-sum WC payment, I decompose the benefit-duration elasticity into the response to increased liquidity and to a decreased opportunity cost of missing work. I estimate that the liquidity effect accounts for 50–60 percent of the increase in claim duration, suggesting that WC provides important insurance value for injured workers.

This research was conducted by the Institute for Civil Justice of RAND Justice, Infrastructure, and Environment.

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