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Welfare Dependence and Self-Control: An Empirical Analysis

Marc Chan

No 19, Working Paper Series from Economics Discipline Group, UTS Business School, University of Technology, Sydney

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.

Keywords: Welfare dependence; hyperbolic discounting; time limits; female labor supply; welfare reform; policy experiment; discrete choice dynamic programming (search for similar items in EconPapers)
JEL-codes: I3 C3 J2 (search for similar items in EconPapers)
Pages: 76 pages
Date: 2014-03-01
New Economics Papers: this item is included in nep-dcm and nep-lma
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Journal Article: Welfare Dependence and Self-Control: An Empirical Analysis (2017) Downloads
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