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Financial Incentives and Earnings of Disability Insurance Recipients: Evidence from a Notch Design

Date & Time:
February 25, 2015 | 3:00 pm - 4:00 pm
Stefan Staubli

Disability Insurance (DI) beneficiaries in many countries lose part or all of their benefits if earnings exceed a threshold, termed the substantial gainful activity (SGA) amount. This rule generates a discontinuous increase in tax liability - a notch - and creates an incentive to keep earnings below the SGA cap in order to retain benefits. Exploiting a notch at the SGA cap in the DI program in Austria, we provide transparent and credible identification of how financial incentives affect earnings of DI beneficiaries. Using rich administrative data, we document large and sharp bunching at the SGA cap. However, the underlying earnings elasticity driving these responses is modest with 0.17. Using this estimate, we show that an abolition of the SGA cap may increase DI beneficiaries' earnings and reduce fiscal costs.  We complement our empirical analysis by comparing the extensive labor supply response of accepted and rejected applicants for DI benefits, which yields similar results as previous studies have found in the U.S. context.

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