Mostly on Monday: Is Workers’ Compensation Covering Off-the-Job Injuries?

Abstract

Social insurance programs that compensate individuals for loss of earnings create incentive problems of three kinds. First, because they receive income support when not working, and lose such support upon returning to work, individuals often face diminished labor supply incentives. Thus, workers receiving more generous social insurance payments as compensation for some economic calamity can be expected to take longer to recover from that calamity. Second, offering insurance payments to those suffering losses can raise the probabilities that such losses will occur. People insured against losses frequently face diminished incentives to avoid risky outcomes, and in cases of overinsurance they can even find it in their best interests to deliberately cause the loss to occur (the problem of moral hazard). The third problem inherent in social insurance programs involves false reporting. Insurance payments are triggered by the occurrence of some contingency, and the temptation to falsely report an occurrence can be quite strong—especially if penalties for misrepresentation are weak and/or the benefits are high.