Time aggregation and state dependence in welfare receipt

Manudeep Bhuller, Christian N. Brinch and Sebastian Königs.

Discussion Papers, Statistics Norway, Research department, No. 771, March 2014  

Dynamic discrete-choice models have been an important tool in studies of state dependence in benefit
receipt. An assumption of such models is that benefit receipt sequences follow a conditional Markov
process. This property has implications for how estimated period-to-period benefit transition
probabilities should relate when receipt processes are aggregated over time. This paper assesses
whether the conditional Markov property holds in welfare benefit receipt dynamics using high-quality
monthly data from Norwegian administrative records. We find that the standard conditional Markov
model is seriously misspecified. Estimated state dependence is affected substantially by the chosen
time unit of analysis, with the average treatment effect of past benefit receipt increasing with the level of
aggregation. The model can be improved considerably by permitting richer types of benefit dynamics:
Allowing for differences between the processes for entries and persistence we find important disparities
especially in terms of the effects of permanent unobserved characteristics. Extending the model further,
we obtain strong evidence for duration and occurrence dependence in benefit receipt. Based on our preferred model, the month-to-month persistence probability in benefit receipt for a first-time entrant is 37 percentage points higher than the entry rate of an individual without previous benefit receipt. Over a 12-month period, the average treatment effect is about 5 percentage points
 

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Published Aug. 4, 2015 3:19 PM - Last modified Jan. 24, 2019 11:44 AM