Abstract
Mandatory Sick Pay Provision: A Labor Market Experiment
Stefan Bauernschuster, Peter Duersch, Jörg Oechssler and Radovan Vadovič
The question whether a minimum rate of sick pay should be mandated is much debated. We study
the effects of this kind of intervention in an experimental labor market that is rich enough to
allow for moral hazard, adverse selection, and crowding out of good intentions to occur. We find
that higher sick pay is reciprocated by workers through higher effort but only if sick pay is not
mandated. We also study adverse selection effects when workers have different probabilities of
getting sick and can reject the hypothesis that this leads to market breakdown. Overall, we find
that mandating sick pay actually leads to a higher voluntary provision of sick pay by firms.