Disability Insurance and the Dynamics of the Incentive Insurance Trade-Off

Abstract

In this online appendix we discuss a number of issues that we left out of the main text for reasons of space. Section A describes further details of the model and solution method. Section B provides further information on the data, including comparability between our data and alternative sources, the quality of self-reported measures, and the consumption imputation. Section C describes the estimation method more fully. Section D provides extensive further robustness checks of the estimation results, particularly of the exclusion restrictions, and of the assumed ways that health enters the model. Section E provides more details on the robustness of our policy experiments to changing the distribution of the noisy signal that the government observes and to changes in risk aversion.

The Use of Structural Models in Econometrics

“…To illustrate the issues, consider the structural model in Low, Meghir, and Pistaferri (2010). This is a life-cycle model of consumption and labor supply with a specific focus on quantifying employment and wage risk and measuring the welfare cost of risk, with implications for the design of welfare programs.…”

“…In Low, Meghir, and Pistaferri (2010), there are two separate sources of risk-employment and productivity-and a particularly complex budget constraint specifying the details of the available welfare programs. The relative simplicity of the specification hides important numerical complexities because the consumption function may be discontinuous in assets due to the discrete labor supply.…”

“…In this section, we discuss computational issues relating to solving these models, which is where most of the difficulty lies. We use Low, Meghir, and Pistaferri (2010) loosely as a case study and discuss in particular the computational implications of relaxing the separability assumptions.…”

“…Such effects are of central importance for understanding the impacts of welfare programs. Similarly, Low and Pistaferri (2015) model the long-run effects of reform to disability insurance, but validate their model using reduced form predictions. This symbiotic interaction of structural models and reduced form approaches, including randomized experiments, provides the strongest tool in the empirical economics toolkit and is emphasized in this paper.…”

“…We contrast the treatment effects approach with structural models, using Low, Meghir, and Pistaferri (2010) as an example of how a structural model is specified and the particular choices that were made. We follow with a discussion of combining structural estimation with randomized experiments.…”