Option Value and Dynamic Programming Model Estimates of Social Security Disability Insurance Application Timing
53 Pages Posted: 15 Dec 2003
Date Written: November 2003
Abstract
This paper develops dynamic structural models - an option value model and a dynamic programming model - of the Social Security Disability Insurance (SSDI) application timing decision. We estimate the time to application from the point at which a health condition first begins to affect the kind or amount of work that a currently employed person can do. We use Health and Retirement Study (HRS) and restricted access Social Security earnings data for estimation. Based on tests of both in-sample and out-of-sample predictive accuracy, our option value model performs better than both our dynamic programming model and our reduced form hazard model.
Keywords: Social Security Disability Insurance, Health and Retirement Survey, option value, dynamic programming
JEL Classification: H31, H55
Suggested Citation: Suggested Citation
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