Temporary versus permanent disability: A dynamic incentives model

This article extends previous disability models in a different and more detailed framework that contemplates both temporary and permanent disability. By introducing different degrees of disability, the paper contributes to the recent debate among empirical scholars on the growth of disability insurance programmes in several OECD countries. This approach allows us to analyse, and consequently compare, the consumption paths of able, temporarily disabled, and permanently disabled workers. Furthermore, in a numerical simulation, the analysis demonstrates that the system of dynamic incentives should adapt the disability benefits to the different disability statuses.