Workers' compensation, moral hazard, and the composition of workplace injuries

This paper provides evidence that workers' compensation insurance (WC) affects not only the occurrence but also the composition of reported injuries. In our theoretical approach, WC is the source of two interrelated moral hazard problems: underprovision of accident-preventing efforts by the insured worker (ex ante moral hazard) and false reporting of injuries (ex post moral hazard). Our model predicts that, under certain assumptions, the impact of WC benefits is stronger on the probability of reporting a difficult-to-diagnose injury titan on the probability of reporting an injury that is easy to diagnose. Panel data on 9,800 workers in the Quebec construction industry over each month of the period 1977-86, combining administrative data from the Quebec Construction Board with data from the Quebec Workers' Compensation Board, are used for the estimates. The parameters of the model are estimated using a three-alternative logit kernel [hybrid multinomial probit (MNP)] framework with individual random effects. Our results confirm our theoretical prediction that the effect (both in absolute and relative terms) of WC coverage is greater on the probability of reporting a injury with difficult diagnosis than on the probability of reporting an injury with easy diagnosis. As a consequence, the WC insurance affects not only the incidence but also the composition of workplace injuries. According to our results, a I percent increase in WC benefits would cause a percentage point increase in the proportion of difficult-to-diagnose accidents varying between 0.13 and 0.4.