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International Tax and Public Finance

, Volume 20, Issue 6, pp 938–960 | Cite as

A continuous model of income insurance

  • Assar Lindbeck
  • Mats PerssonEmail author
Article

Abstract

In this paper we treat an individual’s health as a continuous variable, in contrast to the traditional literature on income insurance, where it is assumed that the individual is either able or unable to work. A continuous treatment of an individual’s health sheds new light on the role of income insurance and makes it possible to capture a number of real-world phenomena that are not easily captured in the traditional, dichotomous models. In particular, we show that moral hazard is not necessarily outright fraud, but a gradual adjustment of the willingness to work, depending on preferences and the conditions stated in the insurance contract. Further, the model can easily encompass phenomena such as administrative rejection of claims, and it clarifies the conditions for the desirability of insurance in the first place.

Keywords

Moral hazard Disability insurance Sick pay Work absence Tax wedge 

JEL Classification

G22 H53 I38 J21 

Notes

Acknowledgements

We are grateful to Per Engström, Mathias Herzing, Harald Lang, Tomas Sjöström, Johan Stennek and Jens Svensson for valuable comments and suggestions on an earlier version of this paper. Assar Lindbeck gratefully acknowledges research support from The Catarina and Sven Hagströmer Foundation.

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Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.Institute for International Economic StudiesStockholm UniversityStockholmSweden
  2. 2.IFNStockholmSweden

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