Disincentive Effects of a Generous Social Assistance Scheme

This study estimates the disincentive effect of a significant increase in social assistance benefits at age 25 in Denmark for unmarried men and women with only compulsory schooling. The study applies a regression discontinuity approach using panel data on the full population of Denmark in the period 1999 to 2006. At age 25 social assistance benefit levels increase from around the average to the highest level among OECD countries. The relative size of the adverse behavioral response to increased benefits is very much in line with related studies from other countries which analyze increases in benefits from low to average OECD levels. By use of very detailed panel data with weekly observations, the study also assesses the extent to which the estimated disincentive effect is due to an increase in transitions onto the program or a decrease in transitions out of the program. The findings suggest that around two thirds of the estimated effect is due to new recipients joining the program.