The Demand for Welfare Generosity

Abstract

This paper estimates economic models of the determinants of state benefit levels in the Aid to Families with Dependent Children (AFDC) program using 1969–1992 data. These models have been extensively researched; however, the existing literature has produced an unacceptably wide range of estimates. Using alternative econometric procedures, this paper systematically examines both the specification assumptions underlying previous analyses as well as several additional specification issues. It is, therefore, able to replicate and reconcile estimates from previous studies and to provide updated, consensus estimates of the demand for welfare generosity. It finds that changes in the average level of income within states have small but statistically significant positive effects on benefits with the confidence bounds on the elasticity extending from 0.11 to 0.82. Changes in the effective price of redistribution are found to have, at most, weak negative effects with elasticities in the range of -0.14 to 0.02. These results are used to evaluate the effects of block grant provisions in the recently enacted welfare reform legislation. © 1999 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology