The desirability of workfare in the presence of misreporting

In this paper we demonstrate that in addition to its acknowledged screening role, workfare—namely, introducing work (or training) requirements for welfare eligibility in means-tested programs—also serves to mitigate income misreporting by welfare claimants. It achieves this goal by effectively increasing the marginal cost of earning extra income in the shadow economy for claimants who satisfy the work requirement. We show that when misreporting is sufficiently prevalent, supplementing a means-tested transfer system with work requirements is socially desirable. Copyright Springer Science+Business Media, LLC 2013