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Financial Incentives and Earnings of Disability Insurance Recipients: Evidence from a Notch Design

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  • Philippe Ruh
  • Stefan Staubli

Abstract

Most countries reduce Disability Insurance (DI) benefits for beneficiaries earning above a specified threshold. Such an earnings threshold generates a discontinuous increase in tax liability—a notch—and creates an incentive to keep earnings below the threshold. Exploiting such a notch in Austria, we provide transparent and credible identification of the effect of financial incentives on DI beneficiaries’ earnings. Using rich administrative data, we document large and sharp bunching at the earnings threshold. However, the elasticity driving these responses is small. Our estimate suggests that relaxing the earnings threshold reduces fiscal cost only if program entry is very inelastic.

Suggested Citation

  • Philippe Ruh & Stefan Staubli, 2018. "Financial Incentives and Earnings of Disability Insurance Recipients: Evidence from a Notch Design," NBER Working Papers 24830, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24830
    Note: AG LS PE
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    More about this item

    JEL classification:

    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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