The Food Stamp Program provides assistance to households with incomes and assets below fixed thresholds. Although it is the largest entitlement program in the social safety net, little is known about the effect of food stamps on stabilizing fluctuations in household income and consumption. To estimate the volatility of income and the attendant reduction in volatility due to food stamps we use data from the Panel Study of Income Dynamics over 1980-1999 along with a model of income that admits permanent and transitory components as well as random growth rate heterogeneity. We then specify a model relating income changes to consumption changes for use in a variance decomposition. This decomposition highlights the role of food stamps in stabilizing food consumption volatility. We estimate the income and food consumption models across a host of samples that vary in the degree of ‘risk’ of food stamp takeup, ranging from all families to those families that lie below the gross income threshold for food stamp eligibility. We find that across all families food stamps reduced income volatility by about 3 percent and consumption volatility by about 4 percent, but this stabilizing role is a much more pronounced 12 and 14 percent among families at high ex ante risk of food stamp participation. Despite the positive role of the Food Stamp Program in smoothing income and consumption shocks there was a marked decline of nearly two-thirds in the income and consumption smoothing benefits of the program in the early 1990s relative to the 1980s. This stabilizing role improved only modestly by the end of the 1990s.
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DP2003-02_gundersen_ziliak.pdf