IZA DP No. 3891: Unintended Consequences of Welfare Reform: The Case of Divorced Parents
published as 'Unintended Consequences of Welfare Reform for Children with Single Parents: A Theoretical Analysis' in: Review of Economics of the Household, 2015, 13(3), 709-733
This paper formulates a model to examine the effects of changes in tax-benefit policy on the behavior of divorced parents and the well-being of children in single-parent households. Noncustodial parents choose the level of a child support payment to transfer to custodians. These, in turn, decide over child good expenditures and the allocation of time between market work and parenting. In general, ex-spouses fail to achieve an efficient allocation of their resources. On the custodial side, there are inefficiently high levels of labor supply and inefficiently low levels of expenditures on child goods, while on the noncustodial side child support payments are suboptimally low. Our results rationalize the adverse effects that welfare reforms might have on divorced parents and their children. Such adverse effects may arise because an increase in the custodian's effective wage, either through lower marginal income tax rates or higher childcare subsidies, reinforces the inefficiencies of divorced parents' decisions: that is, such an increase further depresses child support transfers from noncustodial parents and induces custodial parents to work even more. We explore several extensions of this model, link our findings to the existing empirical literature on the impacts of welfare reform, and discuss the implications of our results for policy and further economic analysis.