The Welfare Implications of Increasing Disability Insurance Benefit Generosity

John Bound, Julie Cullen, Austin Nichols and Lucie Schmidt
Additional contact information
Austin Nichols: University of Michigan, http://www.lsa.umich.edu/econ

No 2002-02, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: The focus on efficiency costs in the empirical literature on Disability Insurance (DI) provides a misleading view of the adequacy of payment levels. In order to evaluate whether workers are over- or under-insured through the social insurance program, we develop a framework that allows us to simulate the benefits as well as the costs associated with marginal changes in payment generosity from a representative cross-sectional sample of the population. Under the assumption that individuals are reasonably risk averse, our simulations suggest the typical worker would value increased benefits somewhat above the average costs of providing them. However, we find that benefit increases tend to lower average utility when we average across all individuals in our sample, particularly at high levels of risk aversion. This counterintuitive finding arises because some lower income DI-insured workers face replacement rates that are near or above one. For such individuals, a benefit increase would represent transfers from an even lower income state of the world in which they are not on DI to one in which they are, a transfer that would not be beneficial even if there were no behavioral distortions associated with the provision of DI benefits.

JEL-codes: H21 H22 H31 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2002-09
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Published in Journal of Public Economics 88(12): 2487-2514.

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Related works:
Journal Article: The welfare implications of increasing disability insurance benefit generosity (2004)
Working Paper: The Welfare Implications of Increasing Disability Insurance Benefit Generosity (2002)
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