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


  • We are grateful for helpful comments received from Sandra Black, Aadne Cappelen, Torbjørn Hægeland, Eric Bettinger, David Cooper, Heather Royer, James Rebitzer, the seminar participants at the University of Oslo, the University of Bergen, Case Western Reserve University, and the Princeton Labor Lunch, the participants at the 2006 IZA/SOLE Transatlantic Meetings and the 2006 Southern Economics Association Meetings, and two anonymous referees. Financial support from the National Science Foundation (SES-0417418) and the Norwegian Research Council (160965/V10) is gratefully acknowledged.


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 the exposure of an individual's neighbors to plant-downsizing events as an instrument for the disability entry rate among the individual's previously employed neighbors. Our instrumental variable (IV) estimates suggest that an increase of one percentage point in the participation rate of previously employed neighbors increased the subsequent four-year entry rate of older workers by about 0.4 percentage points. Numerous robustness and specification tests appear to support the validity of the identifying assumption in our IV strategy.