Abstract

This paper provides a simple framework to evaluate the welfare effects of stricter disability insurance (DI) screening versus lower DI benefits. We develop sufficient-statistics formulas, capturing the insurance value and incentive costs of changes in screening stringency and benefit levels, and implement them for Austria and the United States. In Austria, we exploit exogenous variation in screening stringency and benefit levels arising from several reforms. We ?find that stricter screening significantly reduces DI inflow through both a mechanical effect, capturing that fewer applicants qualify for benefits under the stricter rules, and a behavioral effect, capturing that less people apply for benefits. We also ?find that a decrease in benefits is associated with a significant reduction in DI inflow. Our analysis suggests that DI screening among older workers in Austria has been too lenient, but benefit levels are optimal. For the United States, we use existing estimates from previous studies and find that both relaxing screening and increasing benefits would improve welfare, but the welfare gains from relaxing screening are greater.