Choice Under Uncertainty: A Model of Applications for the Social Security Disability Insurance Program

Not all people with health problems are disabled. Some individuals with severe physical or mental impairments, such as blindness or limb amputation, continue to hold jobs and generally function satisfactorily.They constitute, however, a group of potentially disabled individuals who might apply and qualify for Disability Insurance or other disability-related benefits if they were to lose their jobs or to decide that employment offered an inadequate financial or non-pecuniary reward. Thus, disability, or a health-related inability to work, is more than a medical problem but involves motivational and attitudinal factors. We specify a model of the application process, which we model as choice under uncertainty about approval of an application for Disability Insurance. We specify the possible outcomes to the choice process of an individual in which the probability of acceptance for Disability Insurance is a key consideration. We then estimate a joint model of labor supply and application to the Disability Insurance program based on the 1972 survey. We then compare our results to the observed time series applications process since 1976. Lastly, we estimate the sensitivity of the application process to the probability of acceptance and the level of benefits.