The market for foster care: An empirical study of the impact of foster care subsidies

When parents are suspected of child abuse or neglect, their children may be placed with foster families. We estimate the relationship between the monthly subsidies paid to foster families and the quantity of foster care services provided. The empirical model uses variation in subsidies and foster care populations within 37 states and the years 1987-1995. One innovation in our approach is that we exploit the idea that states do not appear to set market clearing rates, as evidenced by a foster home shortage during this time period. In this case of excess demand, variation in the monthly subsidy traces out the supply curve. Our results show that states with high demand may be able to use economic incentives to recruit foster families. © Springer Science+Business Media, LLC 2007.