A Model of Welfare Competition with Evidence from AFDC

In this paper, we test empirically for strategic behavior among the states using the cash support program Aid to Families with Dependent Children (AFDC). To motivate the empirical work, we adapt Wildasin's [41] model of income redistribution to a model of "interjurisdictional welfare competition." Although welfare competition may be generated from different frameworks, we choose Wildasin's model to illustrate how welfare benefit interdependence is generated in the context of welfare migration. We estimate a "representative reaction function" for AFDC using both cross-sections and pooled cross-section data. After controllingfor other determinants of AFDC benefit levels and for spatial error autocorrelation, we find evidence showing competition.Running head: Welfare Competition.

Saavedra, L.A. (1999), A Model of Welfare Competition with Evidence from AFDC, ZEW Discussion Paper Nr. 99-27, Mannheim.