November 2003

IZA DP No. 941: Option Value and Dynamic Programming Model Estimates of Social Security Disability Insurance Application Timing

revised version published in: Journal of Applied Econometrics, 2004, [View]

This paper develops dynamic structural models - an option value model and a dynamic programming model - of the Social Security Disability Insurance (SSDI) application timing decision. We estimate the time to application from the point at which a health condition first begins to affect the kind or amount of work that a currently employed person can do. We use Health and Retirement Study (HRS) and restricted access Social Security earnings data for estimation. Based on tests of both in-sample and out-of-sample predictive accuracy, our option value model performs better than both our dynamic programming model and our reduced form hazard model.