Abstract
This paper empirically analyzes whether earned income tax credit (EITC) has induced the welfare trap and/or the adverse selection problem. In contrast, previous studies have focused on the effects of EITC on labor income/hours or the labor market participation. With the introduction of EITC, some households may strategically maintain their income below the income threshold level of EITC, called the welfare trap. Also some households may even reduce their income to move below the income threshold level, called adverse selection. Based on the Korean Welfare Panel Study data, this paper does not find the welfare trap, but does find the evidence consistent with the adverse selection problem. These results provide important insights on the recent policy debates between the universal welfare and the selective welfare.
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