Depressing Federalism Re-Assessing Theory and Evidence on the “Race to the Bottom”

While a great deal of research exists on the “race to the bottom ” (RTB) in welfare, this paper argues that very little work has directly tested the core predic-tions of RTB theory. Part of the problem is theoretical ambiguity, something this paper addresses with a formal model of state welfare policymaking that incorpo-rates individual and state level decisions. The model predicts first that while there will not necessarily be “racing ” among states, the potential for welfare-seeking in-migration will place downward pressure on state welfare benefits. The model provides specific guidance for the form of this downward pressure. This predicted relationship is different than what is conventionally tested. We test the hypothesis on panel data on AFDC and TANF from 1985 to 1998. Results are consistent with welfare benefits being depressed in the manner predicted theoretically. ∗I am grateful for significant contributions by Mark Rom to this project. Comments welcome to baileyma@georgetown.edu. Errors and omissions are my responsibility.