The Tradeoff between Knowledge of Mandated Benefits and Moral Hazard

Abstract

When workers are not aware of a mandated benefit, they cannot take it into account in their employment decision, leading to deadweight loss. On the other hand, lack of awareness of a benefit reduces moral hazard, decreasing deadweight loss. I incorporate these trade-offs into a model of mandated benefits and apply the model to Temporary Disability Insurance, an employment benefit mandated in five states. First, I provide evidence on low awareness of this benefit using data collected through an original survey. Then I use the updated mandated benefits model to show that over a broad range of reasonable assumptions, the additional employee valuation of the benefit outweighs the additional program cost from moral hazard, and thus a public information campaign would increase employment.