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

59 Pages Posted: 11 Jun 2018

See all articles by Philippe Ruh

Philippe Ruh

University of Zurich

Stefan Staubli

University of Calgary

Multiple version iconThere are 3 versions of this paper

Date Written: June 2018

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.

Keywords: benefit notch, bunching, Disability insurance, Labor Supply

JEL Classification: H53, H55, J14, J21

Suggested Citation

Ruh, Philippe and Staubli, Stefan, Financial Incentives and Earnings of Disability Insurance Recipients: Evidence from a Notch Design (June 2018). CEPR Discussion Paper No. DP12979, Available at SSRN: https://ssrn.com/abstract=3193982

Philippe Ruh (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Stefan Staubli

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

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