Economics 141A Economics of Government Behavior I

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Economics 141AEconomics ofGovernment Behavior I
Professor Francesca MazzolariFall 2006Lecture 9
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Outline

• Justifications for redistribution
• Inequality and poverty in the U.S.
• Welfare programs in the U.S.
• Moral hazard costs
• Role of categorical programs
• Role of ordeal mechanisms (cont.)
• Role of outside options
• Benefits of redistribution
• Welfare reform

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VI. Role of ordeal mechanisms

• Ordeal mechanisms are features of welfare
  programs that make them unattractive, leading to
  self-selection of only the most needy recipients
• Work or training requirements
• In-kind benefits

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Cash vs. in-kind benefits
VI.

• Cash dominates if individual preferences are to
  be respected, holding the level of transfers
  constant

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Cash vs. in-kind benefits
VI.

• Choice between food and other goods

Other goods
Budget constraint with food stamps
B
D
.
O
A
C
Food
FS
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Cash vs. in-kind benefits
VI.

• Choice between food and other goods

Other goods
E
Budget constraint with cash transfer
B
D
O
FS
A
C
Food
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Cash vs. in-kind benefits
VI.

• Choice between food and other goods

E
Other goods
Irrelevant whether transfer is in cash or in-kind
B
D
Y
X
O
FS
A
C
Food
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Cash vs. in-kind benefits
VI.

• Choice between food and other goods

E
Other goods
In-kind transfer is relatively inefficient
Y
B
D
X
O
FS
A
C
Food
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Cash vs. in-kind benefits
VI.

• In-kind transfers may be preferred if
• Paternalistic view of government role
• Targeting gains (via indicator goods) allow for
  higher transfers

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Soup kitchen example
VI.

• Imagine that there are two types, low (l) and
  high (h) ability, and they enjoy soup (S) but
  dislike waiting in line for it (W)
• The low ability persons utility function is
• The high ability persons utility function is

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Soup kitchen example
VI.

• Imagine social welfare is additive, and the
  government has two bowls of soup to allocate to
  two individuals of different unobserved ability
• What would social welfare be if W 0?
• What would social welfare be if W 61?

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Paradox of ordeal mechanisms
VI.

• Ordeal mechanisms suggest a rationale for
  stigmatizing welfare programs
• Food stamps that are redeemed in public at a
  supermarket
• Waiting in lines at public welfare offices
• Apparently making the less able worse off
  actually makes them better off, because the
  government can make a fixed budget go further

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VII. Role of outside options

• The third approach to reducing moral hazard is to
  increase the outside options available so that it
  is no longer as attractive to be on welfare

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Increasing outside options
VII.

• There are five approaches the government can
  take
• Training
• Labor market subsidies
• Child care subsidies
• Enforcing child support
• Removing welfare lock

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1 - Training
VII.

• The traditional approach to increasing outside
  opportunities is training welfare recipients
• Goal is to increase individuals market wages

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1 - Training
VII.
Consumption
Some individuals will be lifted off welfare
20,000
UZ''
10,000
UZ'
UZ
1000
2000
Leisure
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1 - Training
VII.

• Empirical evidence suggests training programs
  lead to modest declines in welfare receipts and
  increase earnings
• Importance of the local labor market and child
  care support

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2- Labor market subsidies
VII.

• Another approach is to directly subsidize wages
• One fairly expensive, broad approach is the
  Earned Income Tax Credit
• An alternative is targeted wage subsidies to
  those on welfare

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Labor market subsidies
VII.

• Evidence from a wage subsidy program in Canada
  (the Self-Sufficiency program)
• The fraction working full-time doubled in the
  short-run
• Long-run countervailing effects
• Participants take low-wage jobs
• Qualification effect

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3- Child care subsidies
VII.

• A third approach is to subsidize childcare costs
• Raises the net wage

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4 - Enforcing child support
VII.

• Only half of court-ordered payments are made
• Problems
• Many non-paying fathers are poor as well
• The welfare system essentially taxes these
  payments at 100, creating a disincentive for
  women on welfare to help track down deadbeat dads

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Enforcing child support
VII.

• Child support implicitly taxed

Consumption
Again, some individuals will be lifted off welfare
20,000
UZ''
10,000
UZ'
Child support amount
UZ
1000
2000
Leisure
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Enforcing child support
VII.

• Child support not implicitly taxed

Consumption
20,000
Child support amount
10,000
Child support amount
1000
2000
Leisure
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5- Removing welfare lock
VII.

• Cash welfare is often linked with other programs
• Until the mid-1980s, Medicaid was restricted to
  those on AFDC cash welfare
• Leaving welfare entailed the loss of this public
  health insurance

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Removing welfare lock
VII.
Consumption
Medicaid notch
20,000
Value of Medicaid
10,000
Welfare guarantee
1000
2000
Leisure
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Removing welfare lock
VII.
Consumption
Extending Medicaid to non-welfare recipients
20,000
10,000
1000
2000
Leisure
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VIII. Benefits of redistribution

• Improved outcomes for the needy
• Evidence Currie and Cole, American Economic
  Review 1993, Welfare and Child Health The Link
  between AFDC Participation and Birth Weight
• Social insurance against negative shocks
• Evidence Gruber, Journal of Public Economics
  2000, Cash Welfare as a Consumption Smoothing
  Mechanism for Single-Mothers