The Benefits to Taxpayers from Increases in Students - RAND ...

Appendix C
Social Program Participation and Costs
Analytic Approach
In the standard income-leisure model, individuals trade off leisure and income. Under
the presence of some guaranteed (but low) amount of income from social support and
insurance programs, the particular outcome for any individual depends on his or her
personal characteristics (preferences) and the wages that he or she can command in the
labor market. The decision to participate in a social program is dictated by a comparison
of the benefits available from that program and the earnings forgone in the labor
market.
The more educated the individual, the more he or she can command in the labor
market. Therefore, increased educational attainment makes leisure and program participation
less attractive. Similarly, education can change an individual’s preference
curve, lowering the stigma for program utilization, thus moving him or her to a lower
leisure point even assuming no change in wages. Usually, both wage and preference
effects will act together to produce notable changes in behavior.
Therefore, we model program utilization and benefits as a function of income
and individual attributes, including educational attainment. However, education
also affects wages; i.e., it affects program use both directly and indirectly. We further
reduce the model into one with two major inputs—education and other personal
characteristics—as follows:
Y = f(E, D),
where Y is amount of program income, E is a measure of educational attainment, and
D is a vector of demographic characteristics.
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