Simulating the Reform of Means-tested Benefits with Endogenous Take-up and Claim Costs*

Authors


  • *

    We are grateful to two anonymous referees whose comments improved the exposition and helped us spot an error in the first draft. Participants in the NATSEM International Conference on Microsimulation, Canberra, December 2003, made valuable comments. Geraldine Barker and Monica Hernandez provided valuable assistance. The Economic and Social Research Council provided financial support for this research, under project grant R000239105. Material from the Family Resources Survey, made available by the Department for Work and Pensions via the UK Data Archive, has been used with permission. All responsibility for the analysis and interpretation of the data presented here lies with the authors.

Abstract

Microsimulation models are commonly used to examine the distributional impact of reforms of the means-tested benefit system. Take-up behaviour is related to the level of entitlement, so reform may induce changes in take-up. We develop a stochastic simulation method and apply it to a probit model of ‘income support’ take-up by the UK pensioners. The method allows us to adjust net income for the welfare losses because of tangible or intangible claim costs. Endogenous take-up and claim costs both have an important impact on the simulated outcomes of the policy reform.

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