Review of Economic Studies · 2017 · Marc K. Chan
Abstract
A hyperbolic discounting model of labour supply and welfare participation with heterogeneous time preference parameters is estimated. Exclusion restrictions are constructed from variations in behaviour induced by time limits in a welfare reform experiment. We find that most individuals are time-inconsistent, and they exhibit varying degrees of present bias and perception of the commitment problem. Introducing a welfare component to the tax system can make individuals worse off by aggravating the commitment problem. Certain dynamic policy interventions carry sizeable commitment-related work incentives; for instance, a dynamic sanction triggered by past employment can be preferred by some individuals as a commitment device.