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Welfare Dependence and Self-Control: An Empirical Analysis

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Abstract

We use data from Florida Transition Program, a welfare reform experiment in the 1990s, to estimate a discrete choice dynamic programming model of labor supply and welfare participation with potentially time-inconsistent individuals. The time preference parameters are identified through exclusion restrictions generated by welfare time limits. Around one-fourth of the individuals can be regarded as present-biased, and they exhibit a low degree of naivety. Time-inconsistency reduces income by 15 percent and the net tax contribution by almost half. Present-biased individuals are generally more responsive to policy changes than time-consistent individuals. By aggravating the commitment problem, an increase in welfare benefits reduces utility from a time-consistent perspective. An expansion of Earned Income Tax Credit (EITC) can be revenue-neutral due to cross-subsidization between present-biased and time-consistent individuals. A “prowork time limit” is proposed as a more incentivizing policy than standard time limits. A dynamic nonwork tax that is triggered by past employment can generate strong commitment-related incentives and increase utility from a time-consistent perspective. The nonwork tax can be implemented as a targeting intervention, as an estimated 70 percent of present-biased individuals will adopt the policy as a commitment device.

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Bibliographic Info

Paper provided by Economics Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 19.

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Length: 76 pages
Date of creation: 01 Mar 2014
Date of revision:
Handle: RePEc:uts:ecowps:19

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Keywords: Welfare dependence; hyperbolic discounting; time limits; female labor supply; welfare reform; policy experiment; discrete choice dynamic programming;

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  1. Jeremy Lise & Shannon Seitz & Jeffrey Smith, 2003. "Equilibrium Policy Experiments and the Evaluation of Social Programs," Working Papers 1012, Queen's University, Department of Economics.
  2. Christopher A. Swann, 2005. "Welfare Reform When Recipients Are Forward-Looking," Journal of Human Resources, University of Wisconsin Press, vol. 40(1).
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  17. repec:idb:brikps:77778 is not listed on IDEAS
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