Forward-looking moral hazard in social insurance: evidence from a natural experiment

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.