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The Welfare Implications of Health Capital Investment

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  • Sara B. Holland

    (Department of Finance, Terry College of Business, University of Georgia, 439 Brooks Hall, Athens, GA 30602, USA)

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

  • Sara B. Holland, 2014. "The Welfare Implications of Health Capital Investment," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(02), pages 1-27.
    • Handle: RePEc:wsi:qjfxxx:v:04:y:2014:i:02:n:s2010139214500074
    DOI: 10.1142/S2010139214500074
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    References listed on IDEAS

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    1. Jonathan Gruber & Brigitte C. Madrian, 2002. "Health Insurance, Labor Supply, and Job Mobility: A Critical Review of the Literature," JCPR Working Papers 255, Northwestern University/University of Chicago Joint Center for Poverty Research.
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    Cited by:

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