Interstate competition and welfare policy

In 1996, the federal government terminated the Aid to Families with Dependent Children (AFDC) program and replaced it with the Temporary Assistance for Needy Families program (TANF). Many powers once held by the federal government are now being used by state governments. Will welfare assistance be redesigned and expanded or will states "race to the bottom ?" This issue is investigated by examining state welfare policy choices during the latter years of AFDC (1976-1994). Because each state under AFDC had the authority to set the level of its welfare guarantee for families that had no income, it is possible to estimate the effects of interstate competition on AFDC guarantee levels. By estimating a spatial autocorrelation coefficient while controlling for theoretically relevant variables and state fixed effects, this study finds evidence that stales are sensitive to the welfare policies of their competitors.