Workers’ Compensation Benefit Generosity

The authors report four primary components that are used to calculate the net cost of the policy. First, a $1 increase in benefit subsidies costs $1 upfront. Second, the benefit increase leads to higher benefit duration, which in turn increases expenditure on benefits. For a marginal increase in the benefit amount, the marginal increase in benefit duration is given by the elasticity of benefit duration with respect to benefit amount (0.68, estimated by authors). Third, authors found that higher benefit amounts led to higher medical expenditures, covered by insurers, and ultimately paid by government subsidies. The size of this extra cost if given by the marginal impact of a benefit increase in weekly medical expenditures (12.86, estimated by authors) divided by the average duration of benefits (17 weeks), for a total of 1/17 * 12.86 = 0.76. Fourth, higher benefit amounts lead to extra time out-of-work, which decreases government income tax revenue. The extra cost to the government through this channel is given by the elasticity of time out-of-work with respect to benefit amount (0.68, assumed to be equal to the elasticity of benefit duration) times the tax rate (17.9% on average) divided by the typical benefit replacement rate (63% on average in the sample), for a total of 0.68 * 0.179/0.63 = 0.19. The total cost of a marginal increase in benefit amount is therefore 1 + 0.68 + 0.76 + 0.19 = $2.63.

The MVPF is then the ratio of the willingness to pay to the total cost, 1.202/2.63 = 0.46 in the preferred specification. Authors also present alternative estimates varying the coefficient of relative risk aversion in the assumed utility function. These range from 0.43 (when the coefficient of relative risk aversion is 1) to 0.58 (when the coefficient of relative risk aversion is 5).