Ernst-Jan de Bruijn

This paper investigates the effects of application processing times on welfare applicants’ benefit and employment outcomes. For causal inference, we exploit exogenous variation in application processing times stemming from the random assignment of caseworkers. Our findings indicate that longer application processing times deter applicants from receiving benefits, particularly those with better labor market prospects. In contrast, for applicants who eventually receive benefits, longer processing times reduce labor market attachment and increase benefit dependency. Finally, using exogenous variation in caseworkers’ provision of benefit prepayments, we find that the receipt of welfare prepayments increases the employment and earnings of awarded applicants. This suggests that reduced financial stress improves successful job search.

Poverty is associated with a wide range of counterproductive economic behaviors. Scarcity theory proposes that poverty itself induces a scarcity mindset, which subsequently forces the poor into suboptimal decisions and behaviors. The purpose of our work is to provide an integrated, up-to-date, critical review of this theory. To this end, we reviewed the empirical evidence for three fundamental propositions: (1) Poverty leads to attentional focus and neglect causing overborrowing, (2) poverty induces trade-off thinking resulting in more consistent consumption decisions, and (3) poverty reduces mental bandwidth and subsequently increases time discounting and risk aversion. Our findings indicate that the current literature predominantly confirms the first and second proposition, although methodological issues prevent a firm conclusion. Evidence for the third proposition was not conclusive. Additionally, we evaluated the overall status of scarcity theory. Although the theory provides an original, coherent, and parsimonious explanation for the relationship between financial scarcity and economic decision making, the theory does not fully accord with the data and lacks some precision. We conclude that both theoretical and empirical work are needed to build a stronger theory.