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S. Ortigueira, N. Siassi:
"On the Optimal Reform of Income Support for Single Parents";
Bericht für ECON WPS - Working Papers in Economic Theory and Policy; Berichts-Nr. 5, 2021; 46 S.

We characterize the optimal reform of U.S. income support for low-income single parents.
We develop a heterogeneous agents model with idiosyncratic risk and incomplete asset markets
where single parents evolve through three life stages defined by their children´s care needs. Using
the U.S. tax-transfer system as the benchmark policy and a sample of single mothers drawn from
the CPS, we assess reforms that maximize the expected utility of entering mothers. When policy
cannot be tagged by the single mothers´ life stage, the optimal reform calls for an increase in
out-of-work income support by 11 percent, from $6,320 to $7,080, and a decrease in the wage
subsidy to low-wage workers from 34 to 22 percent. This reform delivers substantial welfare
gains for single mothers-to-be, and has the support of a vast majority of incumbent mothers.
Tagging policy by the life stage makes the government´s trade-off between providing insurance
to single mothers in stage one (child in pre-schooling age) and incentivizing them to work when
they transit to stage two (child in school age) more favorable, thus increasing their scope for
smoothing marginal utility throughout life stages. Single mothers in stage one receive $8,950 in
out-of-work support, and no subsidies to low-wages. For single mothers in stage two the optimal
reform prescribes a reduction in out-of-work income support and an increase in work subsidies.
Tagging brings additional welfare gains.

Optimal income transfers; Single-parent households; Intertemporal savings and labor supply

https://publik.tuwien.ac.at/files/publik_298657.pdf