Scandinavian Working Papers in Economics

Working Paper Series,
IFAU - Institute for Evaluation of Labour Market and Education Policy

No 2018:11: Forward-looking moral hazard in social insurance: evidence from a natural experiment

Marcus Eliason (), Per Johansson () and Martin Nilsson
Additional contact information
Marcus Eliason: IFAU - Institute for Evaluation of Labour Market and Education Policy, Postal: Institute for Evaluation of Labour Market and Education Policy, P O Box 513, SE-751 20 Uppsala, Sweden
Per Johansson: IFAU - Institute for Evaluation of Labour Market and Education Policy, Postal: Institute for Evaluation of Labour Market and Education Policy, P O Box 513, SE-751 20 Uppsala, Sweden
Martin Nilsson: IFAU - Institute for Evaluation of Labour Market and Education Policy, Postal: Institute for Evaluation of Labour Market and Education Policy, P O Box 513, SE-751 20 Uppsala, Sweden

Abstract: This study tests for forward-looking moral hazard in the social insurance system by exploiting a 1991 reform in Sweden. The replacement rate was reduced for short absences but not for long absences, which introduced a potential future cost of returning to work. Using this exogenous variation in the replacement rate and controlling for dynamic selection, we find that the potential future cost of returning to work decreased the outflow from absence by 10 percent. This finding suggests that long-term sickness absentees are forward-looking, and highlights the importance of taking forward-looking behavior into account when designing and evaluating social insurance programs.

Keywords: disability Insurance; dynamic Incentives; forward-looking behavior; moral hazard; natural experiment; sickness absence; sickness insurance

JEL-codes: H55; I12; I13; J22

41 pages, September 5, 2018

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