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How Financial Incentives Induce Disability Insurance Recipients to Return to Work

46 Pages Posted: 21 Jul 2012  

Andreas Ravndal Kostøl

University of Bergen

Magne Mogstad

Statistics Norway; IZA Institute of Labor Economics

Abstract

Disability Insurance (DI) programs have long been criticized by economists for apparent work disincentives. Some countries have recently modified their programs such that DI recipients are allowed to keep some of their benefits if they return to work, and other countries are considering similar return-to-work policies. However, there is little empirical evidence of the effectiveness of programs that incentivize the return to work by DI recipients. Using a local randomized experiment that arises from a sharp discontinuity in DI policy in Norway, we provide transparent and credible identification of how financial incentives induce DI recipients to return to work. We find that many DI recipients have considerable capacity to work that can be effectively induced by providing financial work incentives. We also show that providing work incentives to DI recipients may both increase their disposable income and reduce program costs. Our findings also suggest that targeted policies may be the most effective in encouraging DI recipients to return to work.

Keywords: disability insurance, financial incentives, labor supply, regression discontinuity design

JEL Classification: H53, H55, I18, J21

Suggested Citation

Kostøl, Andreas Ravndal and Mogstad, Magne, How Financial Incentives Induce Disability Insurance Recipients to Return to Work. IZA Discussion Paper No. 6702. Available at SSRN: https://ssrn.com/abstract=2114882

Magne Mogstad

Statistics Norway ( email )

N-0033 Oslo
Norway

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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