Health Insurance and Relational Contracts in Small American Firms

This paper studies the provision of health insurance in small private American \u85rms. Using unique data covering about 15,000 \u85rms over the period 2006-2011, we \u85nd that health insurance provision is strongly associated with relational contracts, speci\u85cally with wage shielding. The sensitivity of average wages to local housing prices during the 2008 housing crisis is high for \u85rms with no health insurance, but e¤ectively muted for \u85rms with health insurance (representing 22 % of our \u85rm sample). Consistent with relational contracts theory, we \u85nd that wage shielding is especially strong in industries where rm-speci\u85c training and worker task discretion are high. Using marginal income tax rates as an instrument for health insurance provision, we \u85nd that \u85rms with health insurance have higher pro ts and sales per employee but grow more slowly. Our \u85ndings shed new light on the strategic tradeo¤s associated with developing relational contracts in small \u85rms, and inform contemporaneous policy debates on health insurance reform