We study the incentives to enter and leave homeless shelters. After two years of decline, the number of homeless families in New York City's shelter system began rising again in Spring 1990 and continued to rise until it hit an all-time record high in Summer 1993. The conventional wisdom about why this happened is that a flood of new families were attracted into shelters by the Dinkins administration's aggressive policy of placement into subsidized housing.
We test the conventional wisdom and reject it.
Better prospects of subsidized housing increase flows into the shelter system, but this incentive effect is not nearly large enough to offset the first-order accounting effect - taking families out of the shelters reduces the number of families in them. Why then did the shelter system population grow after Spring 1990? A major part of the reason is that the city responded to conventional wisdom and slowed placement into subsidized housing.
Other major factors were the 1990 92 recession (which slowed self-initiated exits), falling real welfare benefits and NYCHA applications (which increased entries), and greater use of more attractive Tier II shelters instead of hotels.