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Equilibrium Policy Experiments and the Evaluation of Social Programs

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  • Lise, Jeremy

    ()
    (Queen's University)

  • Seitz, Shannon

    ()
    (Queen's University)

  • Smith, Jeffrey A.

    ()
    (University of Michigan)

Abstract

This paper makes three contributions to the literature on program evaluation. First, we construct a model that is well-suited to conduct equilibrium policy experiments and we illustrate effectiveness of general equilibrium models as tools for the evaluation of social programs. Second, we demonstrate the usefulness of social experiments as tools to evaluate models. In this respect, our paper serves as the equilibrium analogue to LaLonde (1986) and others, where experiments are used as a benchmark against which to assess the performance of non-experimental estimators. Third, we apply our model to the study of the Canadian Self-Sufficiency Project (SSP), an experiment providing generous financial incentives to exit welfare and obtain stable employment. The model incorporates the main features of many unemployment insurance and welfare programs, including eligibility criteria and time-limited benefits, as well as the wage determination process. We first calibrate our model to data on the control group and simulate the experiment within the model. The model matches the welfare-to-work transition of the treatment group, providing support for our model in this context. We then undertake an equilibrium evaluation of the SSP. Our results highlight important feedback effects of the policy change, including displacement of unemployed individuals, lower wages for workers receiving supplement payments and higher wages for those not directly treated by the program. The results also highlight the incentives of individuals to delay exit from welfare in order to qualify for the program. Together, the feedback effects change the cost-benefit conclusions implied by the partial equilibrium experimental evaluation substantially.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 758.

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Length: 67 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:iza:izadps:dp758

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Keywords: social experiments; welfare; Self-Sufficiency Project; program evaluation; equilibrium models;

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References

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  1. LaLonde, Robert J, 1986. "Evaluating the Econometric Evaluations of Training Programs with Experimental Data," American Economic Review, American Economic Association, vol. 76(4), pages 604-20, September.
  2. Bent Jesper Christensen & Rasmus Lentz & Dale T. Mortensen & George R. Neumann & Axel Werwatz, 2005. "On-the-Job Search and the Wage Distribution," Journal of Labor Economics, University of Chicago Press, vol. 23(1), pages 31-58, January.
  3. Lin, Zhengxi, 1998. "Employment Insurance in Canada: Recent Trends and Policy Changes," Analytical Studies Branch Research Paper Series 1998125e, Statistics Canada, Analytical Studies Branch.
  4. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics 24, Federal Reserve Bank of Minneapolis.
  5. Jeffrey Smith & Petra Todd, 2003. "Does Matching Overcome Lalonde's Critique of Nonexperimental Estimators?," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20035, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  6. Albrecht, James & van den Berg, Gerard J & Vroman, Susan, 2004. "The knowledge lift: The Swedish adult education program that aimed to eliminate low worker skill levels," Working Paper Series 2004:17, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  7. James J. Heckman & Lance Lochner & Christopher Taber, 1998. "General Equilibrium Treatment Effects: A Study of Tuition Policy," NBER Working Papers 6426, National Bureau of Economic Research, Inc.
  8. Carl Davidson & Stephen A. Woodbury, . "The Displacement Effect of Reemployment Bonus Programs," Upjohn Working Papers and Journal Articles cdsaw1993, W.E. Upjohn Institute for Employment Research.
  9. Garry F. Barrett & Michael I. Cragg, 1998. "An Untold Story: The Characteristics of Welfare Use in British Columbia," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 165-188, February.
  10. Card, D. & Michalopoulos, C. & Robins, P.K., 2001. "Measuring Wage Growth Among Former Welfare Recipients," Papers 2001-5, Gouvernement du Canada - Human Resources Development.
  11. Lise, Jeremy & Seitz, Shannon & Smith, Jeffrey A., 2005. "Evaluating Search and Matching Models Using Experimental Data," IZA Discussion Papers 1717, Institute for the Study of Labor (IZA).
  12. James J. Heckman & Jeffrey A. Smith, 1998. "Evaluating the Welfare State," NBER Working Papers 6542, National Bureau of Economic Research, Inc.
  13. David Card & Dean R. Hyslop, 2005. "Estimating the Effects of a Time-Limited Earnings Subsidy for Welfare-Leavers," Econometrica, Econometric Society, vol. 73(6), pages 1723-1770, November.
  14. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
  15. W. Erwin Diewert, 1988. "On Tax Reform," Canadian Journal of Economics, Canadian Economics Association, vol. 21(1), pages 1-40, February.
  16. Pissarides, C A, 1984. "Efficient Job Rejection," Economic Journal, Royal Economic Society, vol. 94(376a), pages 97-108, Supplemen.
  17. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  18. Connolly, Helen & Gottschalk, Peter T., 2004. "Do Earnings Subsidies Affect Job Choice?," IZA Discussion Papers 1322, Institute for the Study of Labor (IZA).
  19. Bruno, VAN DER LINDEN, 2005. "Equilibrium Evaluation of Active Labor Market Programmes Enhancing Matching Effectiveness," Discussion Papers (ECON - Département des Sciences Economiques) 2005007, Université catholique de Louvain, Département des Sciences Economiques.
  20. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  21. Lars Peter Hansen & James J. Heckman, 1996. "The Empirical Foundations of Calibration," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 87-104, Winter.
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