This paper develops a classical model of the teen fertility decision in the presence of public income transfers. The theoretical model predicts that welfare payments will encourage fertility, holding constant other economic opportunities, and that better economic opportunities will discourage fertility. Considering the possible simultaneity of illegitimacy rates and benefit levels, due to the collective choice process, the authors confirm the theoretical model's predictions with state-level data from 1980 through 1990. The authors find that including fixed effects in the regression to control for unobserved differences between states does not sufficiently control for endogeneity. After controlling for endogeneity, real welfare benefits are strongly and robustly related to teen illegitimacy. The point estimates of the elasticity with respect to changes in the illegitimacy rate are around +1.3 for White teens and +2.1 for Black teens. Real wages for women with a high school education or less are negatively related to teen illegitimacy for White teens, with an elasticity of around -0.4. Finally, male wages appear to have little effect on the illegitimacy rate for White teens but appear negatively correlated with the illegitimacy rate for Black teens in some model specifications.
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