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

58 Pages Posted: 1 Aug 2018 Last revised: 18 Nov 2021

See all articles by Philippe Ruh

Philippe Ruh

University of Zurich

Stefan Staubli

University of Calgary

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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: disability insurance, labor supply, benefit notch, bunching

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. IZA Discussion Paper No. 11667, Available at SSRN: https://ssrn.com/abstract=3217483 or http://dx.doi.org/10.2139/ssrn.3217483

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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