“Welfare Reform and the Dynamic Effects of Time Limits” by Marc Chan
A time limit mandates that federal funds can only cover 5 years of welfare receipt in a single mother's lifetime, but states' limits can differ. This paper is the first to structurally estimate its effects using welfare reform data. We estimate a dynamic optimization model with labor supply and multiple program participation and unobserved effect in welfare participation. The 1996 panel of the Survey of Income and Program Participation is combined with the Welfare Rules Database to control for variations in welfare reform components. Simulated maximum likelihood is conducted with a new kernel-smoothed reservation value simulator. Equivalent variation measures the deadweight loss from transfer programs and dynamic utility loss from the time limit. We find time limits explained half of the reduction in the welfare caseload during the late 1990s. The effects are substantial for families with high unobserved effect. The efficiency loss incurred by time limits is large.