Double-Signal and Take-Up Rate Analyses to Mitigate Information Asymmetry within Welfare Benefit Programs
Abstract
Means-tested welfare programs are prone to moral hazard problems. For example, some individuals reduce their labor supply so that their income level meets the income threshold requirement. These individuals are marginal individuals whose income are slightly above the threshold. Eventually, they may increase their payoff but create information asymmetry problem such that government may not be able to differentiate the individuals who are truly eligible from those who reduce their labor supply to be eligible. Using a signaling game model and incorporating income-related ordeals (i.e. required-hour and essential component) as the signals may help government differentiate the individuals, solve the information asymmetry, increase the social welfare, and, at the same time, maintain the fact that all eligibility requirements are income-related. Using 2013 U.S. state level data, the model predicts that adjusting the cutoff level of the ordeals may change the take-up rates anywhere between 0.008 and 9.233 percent. This range represents the total number of marginal individuals who are in the programs. This shed some light on what particular cutoff level of ordeals a government should impose so that it does not harm the targeted take-up rates.
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