Time Aggregation and State Dependence in Welfare Receipt

49 Pages Posted: 8 Aug 2014

See all articles by Manudeep Bhuller

Manudeep Bhuller

University of Oslo - Department of Economics; Statistics Norway

Christian Brinch

University of Oslo

Sebastian Königs

Organization for Economic Co-Operation and Development (OECD) - Social Policy Division; IZA Institute of Labor Economics

Multiple version iconThere are 3 versions of this paper

Date Written: April 15, 2014

Abstract

Dynamic discrete-choice models are an important tool in studies of state dependence in benefit receipt. A common assumption of such models is that benefit receipt sequences follow a conditional Markov process. This property has implications for how estimated period-to-period benefit transition probabilities should relate when receipt processes are aggregated over time. This paper assesses whether the conditional Markov property holds in welfare benefit receipt dynamics in Norway using high-quality monthly data from administrative records. We find that the standard conditional Markov model is seriously misspecified. Estimated state dependence is affected substantially by the chosen time unit of analysis, with the average treatment effect of past benefit receipt increasing with the level of aggregation. The model can be improved considerably by permitting richer types of benefit dynamics: We find strong evidence for both duration and occurrence dependence in benefit receipt. Allowing for heterogeneity in the entry and persistence processes, we find important disparities in the effects of observed and persistent unobserved characteristics. Based on our preferred model, the month-to-month persistence probability in benefit receipt for a first-time entrant is 37 percentage points higher than the entry rate of an individual without previous benefit receipt. Over a 12-month period, this corresponds to an average treatment effect of 5 percentage points.

Keywords: Time aggregation, Markov property, State dependence, Welfare dynamics

JEL Classification: I38, J60, J64, C23, C41

Suggested Citation

Bhuller, Manudeep and Brinch, Christian and Königs, Sebastian, Time Aggregation and State Dependence in Welfare Receipt (April 15, 2014). Available at SSRN: https://ssrn.com/abstract=2477367 or http://dx.doi.org/10.2139/ssrn.2477367

Manudeep Bhuller (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

HOME PAGE: http://sites.google.com/site/manudeepbhuller

Statistics Norway ( email )

N-0033 Oslo
Norway

HOME PAGE: http://sites.google.com/site/manudeepbhuller

Christian Brinch

University of Oslo ( email )

PO Box 6706 St Olavs plass
N-0317 Oslo
Norway

Sebastian Königs

Organization for Economic Co-Operation and Development (OECD) - Social Policy Division ( email )

Paris
France

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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