A measure of "true" disability is constructed as a continuous index of unobserved work limitation using information from the Health and Retirement Study. Estimates from a simultaneous model of work participation, disability, and income flows suggest that nonworkers tend to substantially overreport limitation, with overreporting most prevalent among nonworking women, high school dropouts, nonwhites, and former blue collar workers. Former white collar workers are found unlikely to overreport limitation. Use of a "biased" disability measure in the model leads to an upward-biased estimate of the effect of limitation on nonwork and to a downward-biased estimate of the effect of income.

The author is an assistant professor of economics at the University of Virginia. He thanks John Bound, Arthur Goldberger, Bill Johnson, Robert Moffttt, Ed Olsen, John Pepper, David Salkever, Steven Stern, Barbara Wolfe, two anonymous referees, and seminar participants at Johns Hopkins University, the University of Virginia, and the University of Wisconsin for helpful comments on earlier drafts of this article. Fidel Perez and. Xin Li provided valuable research assistance, and generous financial support was received from the National Institute of Mental Health. The data used in this article can he obtained beginning June 2000 through May 2003 from the author at the following address.-Department of Economics, University of Virginia, Charlottesville, VA 22903.

© 2002 by the Board of Regents of the University of Wisconsin System

US ISSN 0022-166X

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