Do states play welfare games?

This paper uses a panel of state-level annual data from 1983 to 1994 for each of the contiguous United States and the District of Columbia, to explore the degree to which states simultaneously set welfare benefits. Using instrumental variables estimation, we find substantial empirical evidence that is supportive of the notion of welfare competition. Furthermore, we find that state responses to neighbor benefit decreases tend to be significantly larger in magnitude as their responses to neighbor benefit increases. Our results, therefore, have potential implications for public policy in the wake of the increased decentralization of welfare policy associated with the welfare reform of 1996.