Scandinavian Working Papers in Economics
Umeå Economic Studies,
Umeå University, Department of Economics
No 665: Sickness absence and health care in an economic federation
David Granlund ()
Additional contact information
David Granlund: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Abstract: This paper addresses vertical fiscal externalities in a model where the state governments provide health care and the federal government provides a sickness benefit. Both levels of government tax labor income and policy decisions affect labor income as well as participation in the labor market. The results show that the vertical externality affecting the state governments' policy decisions can be either positive or negative depending on, among other things, the wage elasticity of labor supply and the marginal product of expenditure on health care. Moreover, it is proved that the vertical fiscal externality will not vanish by assigning all powers of taxation to the states.
Keywords: economic federation; moral hazard; vertical fiscal externalities; sickness absence; sickness benefits
29 pages, First version: October 3, 2005. Revised: April 13, 2007.
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