 Adjustment cost and incentives to work: Evidence from a disability insurance programJournal of Public Economics, 2020, vol. 188, issue C Abstract: How important is adjustment cost for individuals who face a change in work incentives induced by a policy change? I provide the first estimate of adjustment cost in the context of a Disability Insurance (DI) program by exploiting a policy change that increased work incentives by increasing the exemption threshold. I use bunching at the thresholds to estimate adjustment cost and earnings elasticity. The estimates of adjustment cost are quite sizeable and heterogeneous. The estimates of earnings elasticity, from both static and dynamic models, are larger than the elasticity estimated with no adjustment cost, suggesting that adjustment cost attenuates the responses to work incentives. Policies designed to increase labor supply will work if the work incentives are large enough to offset the adjustment cost. Accounting for adjustment cost then might explain the disparate findings on the effects of an increase in work incentives on the labor supply of beneficiaries of DI programs. Keywords: Adjustment cost; Optimization friction; Bunching; Kink; Disability Insurance; Earnings elasticity; Dynamic labor supply (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:188:y:2020:i:c:s0047272720300876 DOI: 10.1016/j.jpubeco.2020.104223 Access Statistics for this article Journal of Public Economics is currently edited by R. Boadway and J. Poterba More articles in Journal of Public Economics from Elsevier |
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