Optimal sickness benefits in a principal–agent model

This paper studies the optimal design of sickness benefits in a repeated principal–agent model, where fraudsters are not observed by principal. Sickness compensation protects workers against income fluctuations implied risk illness and its provision is limited presence using this protection to temporarily adjust their labour supply. We show that slope contract depends on dynamics rate over time. When duration temporary shocks disutility work shorter than average diseases, must increase In addition, A tax dependent length sick leave makes it possible minimise cost for given promise-keeping constraint. Contrary intuition, be decreasing because necessity penalise shortest deter agents from cheating.