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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.

Suggested Citation

  • David Autor & Mark Duggan & Jonathan Gruber, 2012. "Moral Hazard and Claims Deterrence in Private Disability Insurance," NBER Working Papers 18172, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18172
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    1. Hahn, Jinyong, 2001. "Comment: Binary Regressors in Nonlinear Panel-Data Models with Fixed Effects," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 16-17, January.
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    Citations

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    Cited by:

    1. David C. Stapleton & Yonatan Ben-Shalom & David R. Mann, 2015. "The Employment/Eligibility Service System: A New Gateway for Employment Supports and Social Security Disability Benefits," Mathematica Policy Research Reports d8835946ad2743028b4b7acfc, Mathematica Policy Research.
    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).
    3. repec:eee:eecrev:v:101:y:2018:i:c:p:230-249 is not listed on IDEAS
    4. repec:pal:gpprii:v:43:y:2018:i:1:d:10.1057_s41288-017-0055-2 is not listed on IDEAS
    5. Wolter H.J. Hassink & Pierre Koning & Wim Zwinkels, 2015. "Employers Opting Out of Public Disability Insurance: Selection or Incentive Effects?," Tinbergen Institute Discussion Papers 15-081/V, Tinbergen Institute.
    6. Richard V. Burkhauser & Mary C. Daly & Nicolas R. Ziebarth, 2016. "Protecting working-age people with disabilities: experiences of four industrialized nations
      [Absicherung von Personen mit Erwerbsminderung: Erfahrungen aus vier Industrieländern]
      ," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 49(4), pages 367-386, December.
    7. David Autor & Andreas Ravndal Kostøl & Magne Mogstad & Bradley Setzler, 2017. "Disability benefits, consumption insurance, and household labor supply," Working Paper 2017/16, Norges Bank.
    8. Biener, Christian & Eling, Martin & Landmann, Andreas & Pradhan, Shailee, 2018. "Can group incentives alleviate moral hazard? The role of pro-social preferences," European Economic Review, Elsevier, vol. 101(C), pages 230-249.
    9. David Stapleton & Robert Burns & Benjamin Doornink & Mary Harris & Robert Anfield & Winthrop Cashdollar & Brian Gifford & Kevin Ufier, 2015. "Targeting Early Intervention to Workers Who Need Help to Stay in the Labor Force," Mathematica Policy Research Reports 496474bae5054b11bfe429d48, Mathematica Policy Research.
    10. Matthew J. Hill & Jose Silva & Judit Vall, 2015. "Act Now: The Effects of the 2008 Spanish Disability Reform," Studies in Economics 1512, School of Economics, University of Kent.
    11. Pian Shu, 2013. "Asset Accumulation and Labor Force Participation of Disability Insurance Applicants," Harvard Business School Working Papers 14-008, Harvard Business School.

    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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