Do Outside Options Matter Inside Marriage? Evidence from State Welfare Reforms

I analyze the impact of the early 1990s state waivers from Aid to Families with Dependent Children (AFDC) guidelines to understand how changes in options outside of marriage affect household expenditures. AFDC waivers decreased the public assistance available to impoverished divorced women and thereby reduced a woman's bargaining threat point in marriage. Using the Consumer Expenditure Survey (CEX) and an empirical synthetic control approach, I find that decreases in potential welfare benefits altered the expenditure patterns of two-parent families. Waivers were associated with increased expenditure on food at home relative to restaurant meals and decreased expenditure on child care and women's clothing, suggesting greater home production and decreased consumption by women. Such changes are evident only for households containing a woman with a reasonable probability of receiving welfare benefits if her marriage ended. The changes in expenditure patterns suggest that reductions in a wife's outside options cause her utility within marriage to decline.