An empirical investigation of interstate AFDC benefit competition

Claims that states which offer generous welfare benefits attract the poor and that some states pay low benefits intending to drive the poor away are neither uncommon nor entirely unfounded. This paper employs a two player (state) generalized game to model states' choice of a benefit level in the Aid to Families with Dependent Children (AFDC) program. Migration by the poor in response to interstate differentials in earnings and welfare opportunities, and the subsequent changes in AFDC caseloads, drive this game. Estimation of the model (using 1979 data) suggests that states within approximately 750 miles of each other do engage in a benefit-setting game. The rival's initial number of poor and preference for non-AFDC consumption appear to be the more influential rival characteristics. These findings, while derived from a different methodological approach, are consistent with previous studies which indicate that welfare recipients tend to move toward higher benefit states. Such migration may impede the efficient spatial allocation of labor. The results also indicate that states will tend to offer lower benefits given recipient migration than would be the case otherwise. State jurisdiction over benefits consequently leads to underprovision of AFDC. Federalization of the AFDC program would improve efficiency in terms of the spatial allocation of labor and the provision of AFDC.