Income and Substitution Effects of a Disability Insurance Reform

Disability insurance (DI) systems are widely criticized for their inherent work disincentives. This paper evaluates the effects of a Swiss DI reform that aims to lower DI benefits for a group of exisiting DI beneficiaries and introduces an additional level to the DI benefit schedule. The reform has only modest effects on earnings and employment but increases the disability degree of those threatened by a DI benefit decline. We estimate bounds on the income and substitution effects by employing the principal stratification framework. The income effect is quantitatively important, whereas the substitution effect is smaller and has bounds that include zero. The evidence suggests that caseworkers helped the insured with low labor market attachment to maintain a full DI benefit.