Welfare Dynamics Under Time Limits

Among the most important changes brought about by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 are time limits, which provide consumers with an incentive to conserve their welfare benefits for future use. Among forward-looking, expected-utility-maximizing consumers who face liquidity constraints and earnings uncertainty, economic theory predicts that the incentive to conserve should be strongest among families with the youngest children. We test this prediction using data from Florida's Family Transition Program, a randomized welfare reform experiment. Our estimates generally exhibit the predicted age dependence, which suggests that time limits affect welfare use before they become binding. Our estimates indicate that, in the absence of other reforms that increased welfare use, FTP's time limit would have reduced welfare receipt by 16 percent