Why is the rate of single parenthood lower in Canada than in the U.S.? A dynamic equilibrium analysis of welfare policies

A critical question in the design of welfare policies is whether totarget aid according to household composition, as was done in the U.S. under the Aid to Families with Dependent Children (AFDC)\ program, or to rely exclusively on means-testing, as in Canada. Restricting aid to single mothers, for instance, has the potential to distort behavior along three demographic margins: marriage, fertility and divorce. We contrast the Canadian and the U.S. policies within an equilibrium model of household formation and human capital investment on children. Policy differences weconsider are: eligibility, dependence of transfers on the number of children, and generosity of transfers. Our simulations indicate that the policy differences can account for the higher rate of single-parenthood in the U.S. They also show that Canadian welfare policy is more effective for fostering human capital accumulation among children from poor families. Interestingly, a majority of agents in our benchmark economy prefers awelfare system that targets single mothers (as the U.S. system does), yet does not (unlike the U.S. system) make transfers dependent on the number of children