Welfare Reform When Recipients Are Forward-Looking

Abstract

In 1996 the Aid to Families with Dependent Children program was replaced with the Temporary Assistance for Needy Families (TANF) program. This paper considers the effects of two specific components of TANF, time limits and work requirements, on employment, marriage, and welfare participation. A discrete-choice dynamic programming model is used, and parameter estimates are obtained using data from the Panel Study of Income Dynamics. Policy simulations show that a five-year lifetime time limit results in a 60 percent reduction in welfare use and that a substantial part of this reduction occurs because recipients are forward-looking. * Contact information: Department of Economics, SUNY-Stony Brook, Stony Brook, NY 11794; Telephone: 631-632-7526; email: chris.swann@sunysb.edu. This paper has been substantially improved by comments from Todd Stinebrickner and two anonymous referees. I received helpful comments on previous versions of this paper from Michael Brien, Fredrick Holt, Edgar Olsen, Steven Stern and numerous seminar participants. All remaining errors are my responsibility.

Welfare Dynamics under Time Limits

“…Other researchers who have considered the effects of time limits include Council of Economic Advisers (1997,1999), Swann (1998), Moffitt (1999), and Ziliak et al (2000). 4 Swann formulates a stochastic dynamic programming model and estimates its parameters with data on AFDC use from the Panel Study of Income Dynamics.…”

A Dynamic Model of Welfare Reform

“…Following Swann (2005), the vector of choicespecific shocks, denoted ε cit , follows an independent and identically distributed (i.i.d.) At zero income, the marginal utility of income is normalized to 1.…”

“…There is an income effect that is generated by the parameter φ 0 . Full-time workers are assumed to be ineligible for welfare (e.g., Swann (2005)). extreme value distribution with means at Euler's constant eu ≈ 0 5772 and standard deviations at π √ 6 σ c , where π √ 6 ≈ 1 2825 is a normalization constant.…”

“…Such a framework allows for a convenient comparison among different policy components, and is critical to understanding how the policies interact with one another and the welfare implications of implementing these policies. 3 Swann (2005), Fang and Silverman (2009), and Keane and Wolpin (2010) used structural life-cycle models estimated on pre-reform data to simulate the effects of time limits and other policies, but the structural estimates generally find mixed results. This line of research treats the policy components to be largely independent of one another and is limited by the variety of counterfactual simulations that can be performed.…”

“…The model is a dynamic extension of earlier static models such as Hoynes (1996) and Keane and Moffitt (1998), and is in a similar vein to Swann (2005) and Keane and Wolpin (2010). It attempts to synergize the methodological approaches undertaken by existing reduced-form and structural studies.…”