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Disability Risk, Disability Insurance and Life Cycle Behavior

  • Hamish Low
  • Luigi Pistaferri

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.

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File URL: http://www.nber.org/papers/w15962.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15962.

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Date of creation: May 2010
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Handle: RePEc:nbr:nberwo:15962
Note: EFG LS PE
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  4. John Bound, 1989. "The Health and Earnings of Rejected Disability Insurance Applicants," NBER Working Papers 2816, National Bureau of Economic Research, Inc.
  5. Hugo Benitez-Silva & Moshe Buchinsky & Hiu Man Chan & Sofia Cheidvasser & John Rust, 2000. "How Large is the Bias in Self-Reported Disability?," Working Papers 2000-01, Brown University, Department of Economics.
  6. Luigi Pistaferri & Hamish Low & Costas Meghir, 2004. "Wage risk and employment risk over the life-cycle," 2004 Meeting Papers 82, Society for Economic Dynamics.
  7. Benitez-Silva, Hugo & Buchinsky, Moshe & Chan, Hiu Man & Rust, John & Sheidvasser, Sofia, 1999. "An empirical analysis of the social security disability application, appeal, and award process," Labour Economics, Elsevier, vol. 6(2), pages 147-178, June.
  8. Mikhail Golosov & Aleh Tsyvinski, 2005. "Designing Optimal Disability Insurance: A Case for Asset Testing," Levine's Bibliography 784828000000000450, UCLA Department of Economics.
  9. Attanasio, Orazio P & Weber, Guglielmo, 1995. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1121-57, December.
  10. Timothy Waidman & John Bound & Austin Nichols, 2003. "Disability Benefits as Social Insurance: Tradeoffs Between Screening Stringency and Benefit Generosity in Optimal Program Design," Working Papers wp042, University of Michigan, Michigan Retirement Research Center.
  11. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the Elderly Save? The Role of Medical Expenses," NBER Working Papers 15149, National Bureau of Economic Research, Inc.
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  15. Laura Turner & Giovanni Gallipoli, 2010. "Household Responses to Individual Shocks: Disability, Labour Supply," 2010 Meeting Papers 110, Society for Economic Dynamics.
  16. John Bound & Julie Berry Cullen & Austin Nichols & Lucie Schmidt, 2002. "The Welfare Implications of Increasing Disability Insurance Benefit Generosity," NBER Working Papers 9155, National Bureau of Economic Research, Inc.
  17. Dan Black & Kermit Daniel & Seth Sanders, 2002. "The Impact of Economic Conditions on Participation in Disability Programs: Evidence from the Coal Boom and Bust," American Economic Review, American Economic Association, vol. 92(1), pages 27-50, March.
  18. John Bound, 1991. "Self-Reported Versus Objective Measures of Health in Retirement Models," Journal of Human Resources, University of Wisconsin Press, vol. 26(1), pages 106-138.
  19. Bound, John & Burkhauser, Richard V., 1999. "Economic analysis of transfer programs targeted on people with disabilities," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 51, pages 3417-3528 Elsevier.
  20. Brent Kreider, 1999. "Latent Work Disability and Reporting Bias," Journal of Human Resources, University of Wisconsin Press, vol. 34(4), pages 734-769.
  21. Bruce D. Meyer & Wallace K.C. Mok, 2013. "Disability, Earnings, Income and Consumption," NBER Working Papers 18869, National Bureau of Economic Research, Inc.
  22. Mary C. Daly & Richard V. Burkhauser, 2000. "The Supplemental Security Income program," Working Paper Series 2001-06, Federal Reserve Bank of San Francisco.
  23. Parsons, Donald O, 1980. "The Decline in Male Labor Force Participation," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 117-34, February.
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  25. Oliver Denk & Jean-Baptiste Michau, 2013. "Optimal Social Security with Imperfect Tagging," Working Papers hal-00796521, HAL.
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