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Household self-insurance and the value of disability insurance in the United States

IFS Working Paper W22/11

This paper uses a life cycle model to study the welfare implications of reforms to U.S. Disability Insurance (DI) while accounting for household self-insurance. In addition to crowding out the insurance value of DI, household self-insurance may drive negative selection into DI by reducing implicit application costs. Allowing for such interactions, I find that expansionary DI reforms do not necessarily improve welfare. However, an asset test reduces negative selection and improves the welfare effects of DI expansions. Household self-insurance crowds out the value of DI expansions, but abstracting away from insurance value can deliver erroneous policy recommendations.

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