Estimating Welfare Effects Consistent with Forward-Looking Behavior. Part I: Lessons from a Simulation Exercise

Abstract

There is an extensive literature in economics that seeks to determine the quantitative impact of welfare benefits on female labor supply and the propensity of women to participate in the welfare system. A growing literature also examines the impact of welfare generosity on fertility and marriage - behaviors that influence welfare eligibility and the level of benefits. Most of the studies adopt a static choice framework, albeit not always explicitly, to motivate their empirical specifications. However, the behaviors that are presumably affected by the welfare system (fertility, marriage, work, school) clearly have both immediate and long-term consequences. If potential welfare recipients are forward-looking, they will consider these long term consequences when making current decisions. In this paper, we investigate the implications of the existence of forward-looking behavior for empirical work that seeks to determine the effect of welfare benefits on behavior.