Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 659: A Model of Income Insurance and Social Norms

Assar Lindbeck () and Mats Persson ()
Additional contact information
Assar Lindbeck: The Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Mats Persson: Institute for International Economic Studies, Postal: Stockholm University, SE-102 91 Stockholm, Sweden

Abstract: A large literature on ex ante moral hazard in income insurance emphasizes that the individual can affect the probability of an income loss by choice of lifestyle and hence, the degree of risk-taking. The much smaller literature on moral hazard ex post mainly analyzes how a “moral hazard constraint” can make the individual abstain from fraud (“mimicking”). The present paper instead presents a model of moral hazard ex post without a moral hazard constraint; the individual's ability and willing­ness to work is represented by a continuous stochastic variable in the utility function, and the extent of moral hazard depends on the generosity of the insurance system. Our model is also well suited for analyzing social norms concerning work and benefit dependency.

Keywords: Moral Hazard; Sick Pay Insurance; Labor Supply; Asymmetric Information

JEL-codes: G22; H53; I38; J21

34 pages, January 25, 2006

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