Working Paper: NBER ID: w15962
Authors: Hamish Low; Luigi Pistaferri
Abstract: This paper provides a life-cycle framework for weighing up the insurance value of disability benefits against the incentive cost. Within this framework, we estimate the life-cycle risks that individuals face in the US, as well as the parameters governing the disability insurance program, using indirect inference and longitudinal data on consumption, disability status, disability insurance receipt, and wages. We use our estimates to characterize the economic effects of disability programs and to consider how policy reforms would affect behaviour and standard measures of household welfare. Because of high levels of false rejections associated with the screening problem, average household welfare increases as the program becomes less strict, despite the worsening incentives that this implies. Incentives for false applications are reduced by reducing generosity and increasing reassessments and these policies also increase average household welfare, despite the worse insurance implied.
Keywords: disability insurance; life cycle behavior; household welfare
JEL Codes: D91; H53; H55; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| less stringent DI program (H53) | increased average household welfare (D19) |
| reducing generosity of DI program (H53) | increased average household welfare (D69) |
| increasing reassessments (E65) | reduced incentives for false applications (J68) |