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Network Effects and Welfare Cultures

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  • Marianne Bertrand
  • Erzo F. P. Luttmer
  • Sendhil Mullainathan

Abstract

This paper empirically examines the role of social networks in welfare participation. Social theorists from across the political spectrum have argued that network effects have given rise to a culture of poverty. Empirical work, however, has found it difficult to distinguish the effect of networks from unobservable characteristics of individuals and areas. We use data on language spoken to better infer an individual's network within an area. Individuals who are surrounded by others speaking their language have a larger pool of available contacts. Moreover, the network influence of this pool will depend on their welfare knowledge. We, therefore, focus on the differential effect of increased contact availability: does being surrounded by others who speak the same language increase welfare use more for individuals from high welfare using language groups? The results strongly confirm the importance of networks in welfare participation. We deal with omitted variable bias in several ways. First, our methodology allows us to include local area and language group fixed effects and to control for the direct effect of contact availability; these controls eliminate many of the problems in previous studies. Second, we instrument for contact availability in the neighborhood with the number of one's language group in the entire metropolitan area. Finally, we investigate the effect of removing education controls. Both instrumentation and removal of education controls have little impact on the estimates.

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Bibliographic Info

Paper provided by Harris School of Public Policy Studies, University of Chicago in its series Working Papers with number 9903.

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Date of creation: Jan 1999
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Handle: RePEc:har:wpaper:9903

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Keywords: welfare; networks;

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References

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  8. George J. Borjas, 1994. "Ethnicity, Neighborhoods, and Human Capital Externalities," NBER Working Papers 4912, National Bureau of Economic Research, Inc.
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  10. Besley, Timothy & Coate, Stephen, 1992. "Understanding welfare stigma: Taxpayer resentment and statistical discrimination," Journal of Public Economics, Elsevier, Elsevier, vol. 48(2), pages 165-183, July.
  11. Anne C. Case & Lawrence F. Katz, 1991. "The Company You Keep: The Effects of Family and Neighborhood on Disadvantaged Youths," NBER Working Papers 3705, National Bureau of Economic Research, Inc.
  12. Evans, William N & Oates, Wallace E & Schwab, Robert M, 1992. "Measuring Peer Group Effects: A Study of Teenage Behavior," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(5), pages 966-91, October.
  13. Edward P. Lazear, 1995. "Culture and Language," NBER Working Papers 5249, National Bureau of Economic Research, Inc.
  14. Moffitt, Robert, 1983. "An Economic Model of Welfare Stigma," American Economic Review, American Economic Association, American Economic Association, vol. 73(5), pages 1023-35, December.
  15. Borjas, George J & Hilton, Lynette, 1996. "Immigration and the Welfare State: Immigrant Participation in Means-Tested Entitlement Programs," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(2), pages 575-604, May.
  16. Benabou, Roland, 1996. "Heterogeneity, Stratification, and Growth: Macroeconomic Implications of Community Structure and School Finance," American Economic Review, American Economic Association, American Economic Association, vol. 86(3), pages 584-609, June.
  17. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 3-42, July.
  18. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 797-817, August.
  19. George J. Borjas, 1994. "Long-run convergence of ethnic skill differentials: The children and grandchildren of the Great Migration," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 47(4), pages 553-573, July.
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