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Moral Hazard and Claims Deterrence in Private Disability Insurance

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  • David Autor
  • Mark Duggan
  • Jonathan Gruber

Abstract

We provide a detailed analysis of the incidence, duration and determinants of claims made on private Long Term Disability (LTD) policies using a database of approximately 10,000 policies and 1 million workers from a major LTD insurer. We document that LTD claims rates are much lower than claims rates on the public analogue to LTD, the Social Security Disability Insurance program, yet LTD policies have a much higher return-to-work rate among initial claimants. Nevertheless, our analysis indicates that the impact of moral hazard on LTD claims is substantial. Using within firm, over time variation in plan parameters, we find that a higher replacement rate and a shorter waiting time to benefits receipt—also known as the Elimination Period or EP—significantly increase the likelihood that workers claim LTD. About sixty percent of the effect of a longer EP is due to censoring of shorter claims, while the remainder is due to deterrence: workers facing a longer EP are less likely to claim benefits for impairments that would lead to a only a brief period of LTD receipt. This deterrence effect is equally large among high and low-income workers, suggesting that moral hazard rather than liquidity underlies the behavioral response. Consistent with this interpretation, the response of LTD claims to plan parameters is driven primarily by the behavior of the healthiest disabled, those who would return to work after receiving LTD.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18172.

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Date of creation: Jun 2012
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Handle: RePEc:nbr:nberwo:18172

Note: AG HE LS PE
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  1. Nicole Maestas & Kathleen Mullen & Alexander Strand, 2012. "Does Disability Insurance Receipt Discourage Work? Using Examiner Assignment to Estimate Causal Effects of SSDI Receipt," Working Papers, University of Michigan, Michigan Retirement Research Center wp241, University of Michigan, Michigan Retirement Research Center.
  2. Aviva Aron-Dine & Liran Einav & Amy Finkelstein & Mark Cullen, 2012. "Moral hazard in health insurance: How important is forward looking behavior?," Discussion Papers, Stanford Institute for Economic Policy Research 11-007, Stanford Institute for Economic Policy Research.
  3. Parsons, Donald O, 1991. "The Health and Earnings of Rejected Disability Insurance Applicants: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 81(5), pages 1419-26, December.
  4. Chetty, Raj, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Scholarly Articles 9751256, Harvard University Department of Economics.
  5. Raj Chetty, 2008. "Erratum: Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 116(6), pages 1197-1197, December.
  6. Bruce D. Meyer & Wallace K.C. Mok, 2013. "Disability, Earnings, Income and Consumption," NBER Working Papers 18869, National Bureau of Economic Research, Inc.
  7. Helen Levy, 2004. "Employer-Sponsored Disability Insurance: Where are the Gaps in Coverage?," NBER Working Papers 10382, National Bureau of Economic Research, Inc.
  8. Jonathan Gruber, 2000. "Disability Insurance Benefits and Labor Supply," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(6), pages 1162-1183, December.
  9. David Autor & Mark Duggan, 2006. "The Growth in the Social Security Disability Rolls: A Fiscal Crisis Unfolding," NBER Working Papers 12436, National Bureau of Economic Research, Inc.
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Cited by:
  1. Pian Shu, 2013. "Asset Accumulation and Labor Force Participation of Disability Insurance Applicants," Harvard Business School Working Papers, Harvard Business School 14-008, Harvard Business School.
  2. Fevang, Elisabeth & Hardoy, Inés & Røed, Knut, 2013. "Getting Disabled Workers Back to Work: How Important Are Economic Incentives?," IZA Discussion Papers 7137, Institute for the Study of Labor (IZA).

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