Income and Substitution Effects of a Disability Insurance Reform

Disability insurance (DI) systems are widely criticized for their inherent work disincentives. This paper evaluates the effects of a Swiss DI reform that aims to lower pensions for a group of existing DI bene?ciaries and introduces an additional notch to the pension schedule. The reform does not signi?cantly affect average earnings and employment, but increases the disability degree of those threatened by a pension decline. We estimate bounds on the income and substitution effects employing the principal strati?cation framework. The in-come effect is quantitatively important, while the substitution e?ect is smaller and bounds include zero.