In the 1980s and early 1990s, America's system of workers' compensation insurance was in trouble. Costs grew rapidly because of escalating medical costs, the increased involvement of attorneys in claims disputes, growing residual markets, and the expansion of compensable injuries.

Patricia M. Danzon and Scott Harrington define the problem, describe the regulatory response, and analyze the effects of rate regulation. The authors demonstrate how regulation intended to control costs can exacerbate cost growth by subsidizing high-risk activities and firms at the expense of low-risk activities and firms. Policy options are discussed.

Patricia Danzon is the Celia Moh Professor of Health Care Systems and Insurance at the Wharton School.

Scott E. Harrington is professor of insurance and finance and the Francis M. Hipp Distinguished Faculty Fellow in the College of Business Adminstration at the University of South Carolina.