Measuring Time-inconsistency: Evidence fromWork-Welfare Decisions in NLSY∗

This paper applies a model of potentially time-inconsistent preferences to the problem of dynamic labor supply and welfare program participation. From panel data on the choices of single women with children, we provide estimates of the degree of time-inconsistency. With these estimates we can quantify the utility loss stemming from the inability to commit to future decisions, and the potential value of commitment mechanisms such as welfare time limits. ∗This paper is preliminary and incomplete. All comments are welcome. We thank Stephano De Vella, Donghoon Lee, Daniele Passerman, Andrew Postlewaite, Matthew Rabin, Kent Smetters and Ken Wolpin for many helpful discussions. We also thank Ken Wolpin for supplying data on U.S. state welfare benefits. Silverman gratefully acknowledges support from the SSRC Fellowship in Applied Economics. †Department of Economics, Yale University, 37 Hillhouse Avenue, New Haven, CT 06511. Email: [email protected]. ‡Department of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia, PA 19104. Email: [email protected].