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 ()
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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

JEL-codes: H21; H42; H77

29 pages, First version: October 3, 2005. Revised: April 13, 2007.

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