Work Requirements and Income Maintenance Programs

This paper examines the role of work as an incentive device in income maintenance programs in different informational environments. To that end, we make both the income generating ability and the disutility of labor of individuals unobservable, and compare the resulting benefit schedules with those of programs found in the United States since Welfare Reform (1996). We find that work requirements arise only in restricted environments due to the tradeoff between incentives and costs. Optimal programs closely resemble a Negative Income Tax with a Benefit Reduction Rate that depends on the distribution of population characteristics.