Designing an Optimal Sickness Insurance. Some Evidence from the Swedish Experience

Risk adverse individuals demand a sickness insurance to cover the risk of income loss due to work incapacity. Since health or sickness is not easy to observe, there is asymmetric information causing the well-known problems with adverse selection and moral hazard. Furthermore, sickness, with resulting inability to work, is to some extent private information hidden to the insurer. One effect is that an efficient market solution will not be established. In Sweden, as in many other countries, there is a public sickness insurance. It is compulsory, thus dealing with the adverse selection problem. The way of handling moral hazard, emanating from private information, is co-insurance and control. The degree and form of co-insurance and control determines the individual's cost of sick leave or other forms of absence from work, thus affecting sick leave. The Swedish sickness insurance offers a unique possibility to analyse incentive effects of different designs. The last decade there have been numerous changes, for example the remuneration level has changed 9 times since early 90ies. The purpose of the paper is to - analyse how sickness leave has responded to the changes in rules - how reactions differ by age, sex, socio-economic group, and other factors We give a short description of the Swedish sickness insurance and the changes that have been legislated the last decade. We also give a description of how absence from work has developed during this period. In analysing sickness leave we use a labour supply model within the context of a labour contract model. The budget restriction changes due to changes in the sickness insurance. To study the responses we use two different data sets, both consisting of panel data analysed by count data and limited/dependent variables approaches.