Social Interaction and Disability Pension Participation: Evidence from Plant Downsizing

We estimate the magnitude of social interaction effects in disability pension participation in Norway. Specifically, we investigate how a worker’s propensity to draw disability benefits is affected by a plausibly exogenous shock to the disability entry rate of similarly-aged workers in his neighborhood. The problem of omitted variable bias is addressed employing a novel instrumental variable (IV) strategy, using plant downsizing at neighbors’ plants of employment as an instrument for the disability entry rate among one’s employed neighbors. Our IV estimates suggest that a one percentage point increase in the participation rate of previously employed neighbors increased the subsequent 4-year entry rate of workers employed at the end of 1999 by 0.65 percentage points. Numerous robustness and specification tests appear to support the validity of the identifying assumption of our IV approach.