Suppose that the disability insurance (DI) program was changed so that individua

Question

Suppose that the disability insurance (DI) program was changed so that individuals who want to receive DI must first go 10 months without working to demonstrate that they are truly disabled instead of the current 5 months.

a. How would this change affect the moral hazard costs of DI?

b. A researcher determines that the acceptance rate (the share of those applying who are accepted into the program) of the DI program increased as a result of the change. He claims this is evidence that the change in the program has increased the moral hazard costs associated with workers’ compensation. Is he correct?

Explanation / Answer

a. With change in Disability Insurance Program, that individuals who want to receive DI must first go 10 months without working to demonstrate that they are truly disabled instead of the current 5 months, the moral hazard cost has reduced. This is due to increase in the waiting time to receive the benefits.

b. The acceptance rate has increased due to change in program as people who are actually eligible apply for the same. This would rather reduce the moral hazard.

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