Disability Insurance and the Dynamics of the Incentive Insurance Trade-Off
- (pp. 2986-3029)
Abstract
We provide a life-cycle framework for comparing insurance and disincentive effects of disability benefits. The risks that individuals face and the parameters of the Disability Insurance (DI) program are estimated from consumption, health, disability insurance, and wage data. We characterize the effects of disability insurance and study how policy reforms impact behavior and welfare. DI features high rejection rates of disabled applicants and some acceptance of healthy applicants. Despite worse incentives, welfare increases as programs become less strict or generosity increases. Disability insurance interacts with welfare programs: making unconditional means-tested programs more generous improves disability insurance targeting and increases welfare. (JEL D14, J24, J65)Citation
Low, Hamish, and Luigi Pistaferri. 2015. "Disability Insurance and the Dynamics of the Incentive Insurance Trade-Off." American Economic Review, 105 (10): 2986-3029. DOI: 10.1257/aer.20110108Additional Materials
JEL Classification
- D14 Household Saving; Personal Finance
- J24 Human Capital; Skills; Occupational Choice; Labor Productivity
- J65 Unemployment Insurance; Severance Pay; Plant Closings