While a mature literature finds that Disability Insurance (DI) receipt discourages work, the welfare implications of these findings depend on two rarely studied economic quantities: the full cost of DI allowances to taxpayers, summing over DI transfer payments, benefi t substitution to or from other transfer programs, and induced changes in tax receipts; and the value that individuals and families place on receiving bene fits in the event of disability. We comprehensively assess these missing margins in the context of Norway’s DI system, drawing on two strengths of the Norwegian environment. First, Norwegian register data allow us to characterize the household impacts and scal costs of disability receipt by linking employment, taxation, benefi ts receipt, and assets at the person and household level. Second, random assignment of DI applicants to Norwegian judges who diff er systematically in their leniency allows us to recover the causal eff ects of DI allowance on individuals at the margin of program entry. Accounting for the total e ffect of DI allowances on both household labor supply and net payments across all public transfer programs substantially alters our picture of the consumption benefi ts and scal costs of disability receipt. While DI denial causes a signifi cant drop in household income and consumption on average, it has little impact on income or consumption of married applicants; spousal earnings and benefi t substitution entirely off set the loss in DI bene t payments. To develop the welfare implications of these fi ndings, we estimate a structural model of household labor supply that translates employment decisions of both spouses into revealed preferences for leisure and consumption. We find that household valuation of receipt of DI bene fits is considerably greater for single and unmarried individuals than for married couples, suggesting that it might be efficient to lower replacement rates or impose stricter screening on married applicants. Joint with David Autor and Magne Mogstad.
Keywords: disability insurance; consumption insurance; household labor supply; added worker
JEL codes: I38, J62, H53
