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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.

Suggested Citation

  • Marc K Chan, 2014. "Welfare Dependence and Self-Control: An Empirical Analysis," Working Paper Series 19, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:ecowps:19
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    Cited by:

    1. Michael P. Keane & Susan Thorp, 2016. "Complex Decision Making: The Roles of Cognitive Limitations, Cognitive Decline and Ageing," Economics Papers 2016-W10, Economics Group, Nuffield College, University of Oxford.
    2. Haan, Peter & Haywood, Luke & Schneider, Ulrich, 2016. "Labor Supply of Mothers: The Role of Time Discounting," Annual Conference 2016 (Augsburg): Demographic Change 145751, Verein für Socialpolitik / German Economic Association.
    3. repec:eee:hapoch:v1_661 is not listed on IDEAS

    More about this item

    Keywords

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

    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

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