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Estimating Welfare Effects Consistent with Forward-Looking Behavior. Part I: Lessons from a Simulation Exercise

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  • Michael P. Keane
  • Kenneth I. Wolpin

Abstract

An extensive literature in economics seeks to determine the quantitative impact of welfare benefits on economic and demographic behaviors. Most studies adopt a static choice framework to motivate their empirical specifications. The behaviors that are studied, however, have both immediate and long-term consequences. If potential welfare recipients are forward looking, they will consider these long-term consequences when making current decisions. In this paper we investigate the implications of the existence of forward-looking behavior for estimation methodology. In the companion paper that follows, we estimate the effect of welfare on those decisions adopting an empirical specification that is consistent with forward-looking behavior and interpretable within that framework.

Suggested Citation

  • Michael P. Keane & Kenneth I. Wolpin, 2002. "Estimating Welfare Effects Consistent with Forward-Looking Behavior. Part I: Lessons from a Simulation Exercise," Journal of Human Resources, University of Wisconsin Press, vol. 37(3), pages 570-599.
  • Handle: RePEc:uwp:jhriss:v:37:y:2002:i:3:p:570-599
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