Incentive Effects of Disability Benefits

We provide novel evidence on the trade-off between insurance and incentives when adjusting disability insurance (DI) benefit generosity using a comprehensive measure that encompasses not only the effect on take-up but also behavioral responses of DI recipients with respect to employment and exit from DI. Based on administrative data from the German pension insurance and exogenous policy variation, we identify the relevant behavioral margins induced by a change in benefit generosity. Using a theoretical framework, we show that our comprehensive measure of incentive effects implies a fiscal multiplier of 1.83. Incorporating elasticities with respect to exit from DI increases the fiscal multiplier compared to estimates that only account for take-up elasticities. In the context of the model, we estimate that increasing benefits is welfare improving, given the insurance effects of DI benefits estimated in previous literature.