Entrepreneurship and Job Lock: The Interaction Between Tax Subsidies and Health Insurance Regulations

This paper examines the connection between two policies that encourage self-employment: health insurance tax subsidies and insurance market underwriting reforms. I estimate the effect of subsidizing health insurance for the self-employed and show that these policies can lead to large increases in self-employment. However, the effect differs substantially based on state insurance market regulations and on individuals’ health status. Using a novel theoretical framework and data from the Panel Study of Income Dynamics, I show that households with preexisting conditions do not respond to tax subsidies in states in which such conditions are grounds for denial. In contrast, households with pre-existing conditions are more responsive than healthy individuals in states in which pre-existing conditions result in higher premiums rather than denial. Neither type of household responds to tax subsidies in states with heavy price regulation, similar to that required by the Affordable Care Act.