Working Paper: NBER ID: w24830
Authors: Philippe Ruh; Stefan Staubli
Abstract: Most countries reduce Disability Insurance (DI) benefits for beneficiaries earning above a specified threshold. Such an earnings threshold generates a discontinuous increase in tax liability—a notch—and creates an incentive to keep earnings below the threshold. Exploiting such a notch in Austria, we provide transparent and credible identification of the effect of financial incentives on DI beneficiaries’ earnings. Using rich administrative data, we document large and sharp bunching at the earnings threshold. However, the elasticity driving these responses is small. Our estimate suggests that relaxing the earnings threshold reduces fiscal cost only if program entry is very inelastic.
Keywords: Disability Insurance; Financial Incentives; Labor Supply; Bunching; Earnings Threshold
JEL Codes: H53; H55; J14; J21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SGA threshold (C24) | earnings bunching (M52) |
| SGA threshold (C24) | average earnings without threshold (J31) |
| earnings bunching (M52) | earnings elasticity with respect to net-of-tax rate (H32) |
| SGA threshold (C24) | labor force participation (J22) |