Berkeley Program in Law and Economics

The "great compromise" of workers compensation, whereby workers relinquished the right to sue their employers in exchange for no-fault recovery for occupational injuries, was one of the great tort reforms of the Twentieth Century. Because participation in the workers compensation system is usually compulsory, it is difficult to forecast what the real-world effects might be of making participation voluntary. Yet there is one U.S. state that permits employers to decline workers compensation coverage, and in which a significant number of firms(called "nonsubscribers") have chosen to opt out: Texas. This study is the first to examine comprehensively the impact of Texas nonsubscription on the frequency, cost, distribution, and duration of occupational injury claims. To minimize the effects of selection bias, I analyze confidential, highly granular data obtained from three large companies that operate homogenous facilities across a large number of U.S. states. Using the facility and the claim as the units of analysis, I find that Texas nonsubscription is generally associated with lower frequency of indemnity claims, and with lower average per-claim costs for both wage replacement benefits and medical care. Taken as a whole, my findings suggest that at least for large firms, the high cost of workers compensation insurance may outweigh the benefits of tort immunity.