Bargaining Over Benefits in a Democracy

This paper studies how the generosity of health insurance benefits is determined in the understudied context of government employers. We propose an extension to employer-union bargaining frameworks from the literature on private employer-labor relations. In addition to the standard cost minimization incentive that puts downward pressure on benefit generosity, government employers' objective function may include preferences for generous benefits by workers who are also voters. This framework helps to reconcile competing views of government as a self-interested Leviathan versus as a mechanism for implementing voter preferences. The presence of workers who are also voters can give rise to Leviathan-like outcomes even in the absence of Leviathan preferences among the elected officials themselves. Our empirical strategy exploits a 2011 policy change that affected Massachusetts municipal employers by shifting all the bargaining power in employer-union health insurance negotiations to the employer. In spite of their newfound ability to unilaterally reduce benefit generosity, only half of municipalities do so, and the majority of those continue to offer benefits above the state-mandated minimum. Nevertheless, we show that voter preferences also play a role. Municipalities are more likely to reduce benefit generosity the more binding their constraint on additional revenue raising, and therefore the higher the marginal value of a health insurance dollar diverted to other public spending. Moreover, we find savings from reduced health insurance generosity are partially diverted toward increased spending on education. While this suggests crowd-out of public education spending by employee health insurance spending, consistent with a Leviathan view of government, it also shows that elected officials shift spending to be more in line with voter preferences when given the opportunity. Our findings highlight the importance of outside options and bargaining strength in determining how public dollars are spent.