The demand for child care subsidies under rationing

Abstract

The resources of the Child Care and Development Fund (CCDF) are insufficient to meet the increasing demand for child care subsidies caused by the 1996 welfare reform in the U.S. Since these subsidies are not an entitlement, there is rationing, i.e. not all eligible families who demand a subsidy receive one. In the presence of rationing, a combination of demand- and supply-side factors plays a role in determining subsidy utilization. Accordingly, this paper models the demand for child care subsidies under rationing as a partially strategic game among applicant mothers and local agencies, in which mothers are considering their probability of being rationed out of the subsidy when they decide whether or not to apply. I estimate the model using a Maximum Likelihood approach with repeated cross-section data from the National Survey of America’s Families. For exclusion restriction to help identify the model, I use the variation across states in the amount of pre-determined child care funding, scaled by the number of young children in each state. The results enable us to simulate the effect of different subsidy policies and to estimate the latent demand for subsidies. The latter includes families discouraged from applying who would demand a subsidy in the case of no rationing. Policy simulations suggest a latent demand 16% larger than observed demand in the sample. Even when completely eliminating rationing, a large fraction of potential beneficiaries would continue to opt out of the subsidies. Hence it is it is more affordable than might be expected to reduce the chronic underfunding of these subsidies.