Social Interaction Effects in Disability Pension Participation: Evidence from Plant Downsizing

We estimate the magnitude of social interaction effects in disability pension participation among older workers in Norway. The problem of omitted variable bias is addressed using neighbors’ exposure to plant downsizing events as an instrument for the disability entry rate among one’s previously 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 older workers by about one-half a percentage point. Numerous robustness and specification tests appear to support the validity of the identifying assumption in our IV strategy.