Option Value and Dynamic Programming Model Estimates of Social Security Disability Insurance Application Timing

53 Pages Posted: 15 Dec 2003

See all articles by Richard V. Burkhauser

Richard V. Burkhauser

Cornell University - Department of Policy Analysis & Management (PAM); University of Melbourne, Melbourne Institute

J.S. Butler

Syracuse University - Department of Economics; University of Kentucky

Gulcin Gumus

Florida International University (FIU); IZA Institute of Labor Economics

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

Burkhauser, Richard V. and Butler, J.S. and Gumus, Gulcin, Option Value and Dynamic Programming Model Estimates of Social Security Disability Insurance Application Timing (November 2003). IZA Discussion Paper No. 941. Available at SSRN: https://ssrn.com/abstract=475024

Richard V. Burkhauser

Cornell University - Department of Policy Analysis & Management (PAM) ( email )

120 Martha Van Rensselaer Hall
Ithaca, NY 14853
United States

University of Melbourne, Melbourne Institute ( email )

Level 5, FBE Building, 111 Barry Street
161 Barry Street
Carlton, VIC 3053
Australia

J.S. Butler

Syracuse University - Department of Economics ( email )

Syracuse, NY 13244-1020
United States
315-443-4589 (Phone)
315-443-1081 (Fax)

University of Kentucky ( email )

Lexington, KY 40546
United States

Gulcin Gumus (Contact Author)

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

IZA Institute of Labor Economics ( email )

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

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