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Disability Insurance and the Dynamics of the Incentive Insurance Trade-Off

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  • Hamish Low
  • Luigi Pistaferri

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)

Suggested Citation

  • Hamish Low & Luigi Pistaferri, 2015. "Disability Insurance and the Dynamics of the Incentive Insurance Trade-Off," American Economic Review, American Economic Association, vol. 105(10), pages 2986-3029, October.
  • Handle: RePEc:aea:aecrev:v:105:y:2015:i:10:p:2986-3029
    Note: DOI: 10.1257/aer.20110108
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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