Welfare Dependence and Self-Control: An Empirical Analysis
AbstractWe 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 InfoPaper provided by Economics Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 19.
Length: 76 pages
Date of creation: 01 Mar 2014
Date of revision:
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More information through EDIRC
Welfare dependence; hyperbolic discounting; time limits; female labor supply; welfare reform; policy experiment; discrete choice dynamic programming;
Find related papers by JEL classification:
- I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
- C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
- J2 - Labor and Demographic Economics - - Demand and Supply of Labor
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-03-30 (All new papers)
- NEP-DCM-2014-03-30 (Discrete Choice Models)
- NEP-LMA-2014-03-30 (Labor Markets - Supply, Demand, & Wages)
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