Consider the effects of a government transfer payment that falls as income rises (such as food stamps).Economic theory predicts that:

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The income effect of a transfer payment that falls as income rises is to decrease the incentive to work since the payment reduces the need for earned income. However, the substitution effect, which arises because the payment reduces the effective wage rate, increases the incentive to work, though by a smaller amount. The net effect of the two effects is to reduce the incentive to work, resulting in a reduction in work effort. Therefore, both the income and substitution effects tend to reduce work effort.

Consider the Effects of a Government Transfer Payment That Falls