Simulating the Reform of Means-Tested Benefits with Endogenous Take-Up and Claim Costs

Abstract

Microsimulation models are commonly used to examine the distributional impact of reforms of the means-tested benefit system. Take-up behaviour is related to the level of entitlement, so reform may induce changes in take-up. We develop a stochastic simulation method and apply it to a probit model of Income Support take-up by British pensioners. The method allows us to adjust net income for the welfare losses due to tangible or intangible claim costs. Endogenous take-up and claim costs both have an important impact on the simulated outcomes of the policy reform.