Does means-testing welfare discourage saving? evidence from a change in AFDC policy in the United States

This paper provides empirical evidence on the impact of a welfare program's asset test on the saving behavior of its target population. The approach exploits a policy 'experiment'; the essential federalization of the AFDC program's asset-testing policy in 1981. Data on female-headed households from the National Longitudinal Survey-Young Women are used to test the hypothesis that likely AFDC users adjusted their asset stocks in response to this change. The findings indicate additional saving between 1978 and 1983 of about 25 cents for each additional $1 increase in the limit in most states. (C) 1998 Elsevier Science S.A.