Saturday, November 10, 2012
Hall of Fame (Sheraton Baltimore City Center Hotel)
*Names in bold indicate Presenter
Abstract: Conventional studies of labor supply in the presence of income-tested social programs implicitly assume that income eligibility for program participation is constantly monitored by the government. However, this is not how most of these programs operate in practice, and the time until the next eligibility recertification can be as long as a year. In particular, the Balanced Budget Act of 1997 gives states the option of insuring children in their Medicaid/CHIP program continuously for up to 12 months regardless of changes in family income. The long recertification period in effect increases the size of the benefit notch, and neoclassical labor supply models predict that agents may lower their labor supply before the application month to gain program eligibility and then increase their labor supply until the next eligibility check. I use the 2001 and 2004 panels of Survey of Income and Program Participation (SIPP) to empirically examine the income and labor supply responses of parents whose children are publicly insured. Comparing theoretical predictions and the empirical evidence points to little labor supply response. Given the absence of strategic behavior, I propose a simple framework to compute the optimal length of the continuous eligibility period relying on the mechanical properties of the income processes observed in SIPP, and derive a mapping from the recertification cost parameters to the optimal monitoring frequencies.