Unintended Consequences of Welfare Reform: The Case of Divorced Parents
University of Essex; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
University of Saint Andrews - School of Economics & Management
Wilbert Van der Klaauw
Federal Reserve Bank of New York; University of North Carolina (UNC) at Chapel Hill - Department of Economics
IZA Discussion Paper No. 3891
This paper formulates a model to examine the effects of changes in tax-benefit policy on the behavior of divorced parents and the well-being of children in single-parent households. Noncustodial parents choose the level of a child support payment to transfer to custodians. These, in turn, decide over child good expenditures and the allocation of time between market work and parenting. In general, ex-spouses fail to achieve an efficient allocation of their resources. On the custodial side, there are inefficiently high levels of labor supply and inefficiently low levels of expenditures on child goods, while on the noncustodial side child support payments are suboptimally low. Our results rationalize the adverse effects that welfare reforms might have on divorced parents and their children. Such adverse effects may arise because an increase in the custodian's effective wage, either through lower marginal income tax rates or higher childcare subsidies, reinforces the inefficiencies of divorced parents' decisions: that is, such an increase further depresses child support transfers from noncustodial parents and induces custodial parents to work even more. We explore several extensions of this model, link our findings to the existing empirical literature on the impacts of welfare reform, and discuss the implications of our results for policy and further economic analysis.
Number of Pages in PDF File: 42
Keywords: non-intact families, in-work benefit reform, child care, child support, non-cooperation
JEL Classification: D13, H31, J22working papers series
Date posted: December 22, 2008
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