A continuous model of income insurance
- 343 Downloads
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.
KeywordsMoral hazard Disability insurance Sick pay Work absence Tax wedge
JEL ClassificationG22 H53 I38 J21
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.
- Diamond, P. A. (2003). Taxation, incomplete markets, and social security. The 2000 Munich lectures. Cambridge: MIT Press. Google Scholar
- Rees, R. (1989). Uncertainty, information and insurance. In J. D. Hey (Ed.), Current issues in microeconomics, London: Macmillan. Google Scholar
- Stiglitz, J. E. (1983). Risk, incentives and insurance: the pure theory of moral hazard. The Geneva Papers on Risk and Insurance. Issues and Practice, 8(26), 4–33. Google Scholar