Economic aspects of optimal disability benefits

This paper analyzes optimal disability and retirement (or welfare) benefits with imperfect disability evaluation (with some able workers judged disabled and some disabled workers judged able). Thus the levels of both disability and retirement benefits affect labor supply. With anyone not working eligible for retirement benefits, we analyze the optimal structure of benefits for a given disability screening mechanism and briefly consider the problem of optimal evaluations of disability evidence. In the United States, there is an overlap in eligibility for disability and retirement portions of Social Security. More generally, welfare is sometimes available to people denied disability benefits.