Do welfare dependent neighbors matter for individual welfare dependency?

This paper investigates neighborhood peer effects on individual welfare using a combined IV and control function approach. The empirical analysis is based on panel data for the years 2007-2010 constructed by enriching the geo-referenced version of the German Socio-Economic Panel (GSOEP) with aggregated zip code level-information. The results suggest that individual welfare use is positively correlated with neighborhood social benefit recipient rates, i.e. an increase in the share of neighborhood peers on social benefit by 1 percentage point raises the individual probability of welfare use by 0.97 percentage points.