Medicaid and the Supply of Entrepreneurs: Evidence from the Affordable Care Act

This paper aims to examine the effects of the Medicaid expansion on self-employment. The Medicaid expansion under the Affordable Care Act (ACA) has significantly increased the access to health insurance and its coverage for low income households. Previous studies on the ACA Medicaid expansion has mostly focused on labor market outcomes such as employment, hours of worked, wages, full-time/part-time transitions, etc. (e.g. Duggan, Goda, and Jackson 2017; Leung and Mas, 2016; Kaestner et al, 2017). But the ACA Medicaid effect on self-employment and its transition have received little attention, although the growing literature has found the evidence that the increase in access to health insurance may increase self-employment by reducing “entrepreneurship lock” (e.g. Fairlie et al 2010; Bailey 2017).

In order to examine the effects of Medicaid expansion on self-employment, I take the advantage of a quasi-experiment created by variation in states’ decisions on expanding Medicaid under the ACA. In 2014, 25 states and DC expanded Medicaid eligibility to all individuals in families with incomes below 138% of the federal poverty line (FPL). Since then, additional 7 states have adopted the expansion. By using the geographic and time variations, I apply difference-in-differences with the monthly Current Population Survey (CPS), the CPS Annual Social and Economic Supplement (ASEC), and the CPS Merged Outgoing Rotation Groups (MORG) from 2010 and 2016. To deal with heterogeneity across states, I also apply contiguous county border discontinuity and synthetic control approaches.

To understand the effects of Medicaid expansion, I focus on three outcomes: the rate of self-employment, the entry into self-employment, and the exit from self-employment. This is because the Medicaid may not only reduce entrepreneurship lock but also provide income effects. By examining the rate of self-employment, I estimate the average effects of the Medicaid expansion. By investigating entry and exit, I study separate channels of the effects of Medicaid expansions. If the Medicaid expansion reduces entrepreneurship lock, the entry into self-employment should significantly increase, whereas if the Medicaid expansion induces income effects, the exit from self-employment should significantly increase.

My study will contribute to the literature on entrepreneurship lock by providing evidence from larger population, especially for low income and low educated households. In addition, sub-group analysis for parents, childless adults, low income, and low education will provide nuanced evidence to help understand previous study results using different groups.