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

Philippe Ruh, Stefan Staubli

NBER Working Paper No. 24830
Issued in July 2018, Revised in September 2018
NBER Program(s):Economics of Aging, Labor Studies, Public Economics

Most countries reduce Disability Insurance (DI) benefits for beneficiaries earning above a specified threshold. Such an earnings threshold generates a discontinuous increase in tax liability—a notch—and creates an incentive to keep earnings below the threshold. Exploiting such a notch in Austria, we provide transparent and credible identification of the effect of financial incentives on DI beneficiaries’ earnings. Using rich administrative data, we document large and sharp bunching at the earnings threshold. However, the elasticity driving these responses is small. Our estimate suggests that relaxing the earnings threshold reduces fiscal cost only if program entry is very inelastic.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w24830

Published: Philippe Ruh & Stefan Staubli, 2019. "Financial Incentives and Earnings of Disability Insurance Recipients: Evidence from a Notch Design," American Economic Journal: Economic Policy, vol 11(2), pages 269-300.