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The central trade-off for designing Disability Insurance (DI) is between providing
insurance to those in need while maintaining incentives to work. This paper
develops a novel revealed-preference approach to identify the insurance value of
DI benefits. We show that comparing the DI take-up response to a change in benefits
versus a change in wages identifies the insurance value. Implementing our
framework in Canada, we estimate that increasing DI benefits by $1 creates an additional
disincentive cost of $0.60 but creates an insurance value of $2.20. Thus,
our approach suggests that DI benefits are not overly generous in the Canadian
context.
