The Impact of Benefit Generosity on Workers’ Compensation Claims : Evidence and Implications

Optimal insurance benefit design requires understanding how coverage generosity impacts individual behavior, insured costs, and welfare. Using unique administrative data, we leverage a sharp increase in the maximum weekly wage replacement benefit in a difference-in-differences research design to identify the impact of workers’ compensation wage replacement benefit generosity on individual behavior and program costs. We find that increasing the generosity of wage replacement benefits does not impact the number of claims but has a large impact on claimant behavior, leading to longer income benefit durations and increased medical spending. Our estimates indicate that behavioral responses to increased benefit generosity raised insured costs 1.4 times as much as the mechanical effect of the benefit increase. Drawing on these estimates along with an estimate of the consumption drop experienced by injured workers, we calibrate a model that suggests that increasing benefit generosity would not improve welfare