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Poverty Alleviation (Welfare Programmes (Means-Tested Cash Programme (B =…
Poverty Alleviation
Welfare Programmes
Eligibility
- Universal: Equal access to benefits for all citizens
- Means-tested: Access is restricted by income and assets
- Categorical: Access restricted by personal characteristics (e.g. kids, martial status, immigration status, disability, old age)
Benefit
- Cash: Provision of cash benefits
- In-kind programmes: Provision or subsidisation of goods such as medical care, food, and housing
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Incomplete take-ups: Not all eligibles take up benefits.
- Welfare stigma (i.e. people do not apply for these programmes as they get stigmatised in society)
- Imperfect information (i.e. people do not know of these programmes)
- Transaction costs due to take-ups, e.g. ordeals
Moral Hazard
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2 Types of Moral Hazard:
- Not-so-poor masquerade as poor to qualify for higher benefits. This makes social programmes more expensive.
- Rich masquerade as not-so-rich to avoid some of the income tax. This reduces revenue for social programmes.
Information Asymmetry
Background:
- A first-best benefit scheme would be based on earnings capacity/ability (w), which is immutable for the individual
- However, due to information asymmetry, government only observes earnings wh, which is a choice variable (i.e. people can choose how much to earn)
- Thus, an earnings-based programme will only be second-best: it will induce high-ability individuals to reduce earnings and masquerade as low-ability individuals
Solutions
Tagging
Conditions
- Observable to the government (makes targeting feasibale)
- Correlated with earnings capacity/ability (redistributes from high- to low-ability)
- Immutable to the individual, i.e. unresponsive to incentives (ensures that there is no moral hazard associated with redistribution)
Problems
- Ethical issues (e.g. use of height as a tag)
- Controversy (e.g. use of single motherhood, race etc as tags)
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In-kind Benefits
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Problems:
- Cash programmes have the most utility due to consumer sovereignty. Utility gain from receiving a bundle of goods is never higher than cash value of goods. However, while this applies for each recipient individually, self-revelation of the overall population is more beneficial
Nichols-Zeckhauser Condition
- If, conditional on income, demand is higher for low-ability individuals, then in-kind transfers can improve target efficiency
- I.e. If both low-ability and high-ability individuals have the same income, and low-ability individuals still demand more of a certain type of good, this good is an indicator good and subsidising/provision of this good can lead to effective redistribution
- Conversely, if differences in demand are only due to income effects (i.e. the differences in demand will disappear if both low-ability and high-ability individuals have the same income), then in-kind transfer cannot improve target efficiency
Ordeals
Concept: Pure deadweight cost on recipients. Examples include:
- Work and training requirements
- Tedious and complex administrative procedures
- Demeaning qualification tests
- In-hospital requirements in health insurance
Elaboration: Ordeals serve as a screening function:
- Utility gain from transfers is lower for the high-ability people
- Utility cost of the ordeal is higher for the high-ability people
- By introducing time loss, the time loss is more costly to the high-ability people which discourages them from trying to claim benefits from the programme
Problems:
- We need to remember that ordeals constitute a deadweight loss, thus total benefits from screening need to be greater than total costs of ordeal
- Ordeals may backfire, and screen out more-deserving applicants. For instance, assume a tedious administrative process for disability insurance involving multiple and different offices. A person who is less disabled is able to complete the process much better than someone who is more disabled.
- Transaction costs due to ordeals could be an important factor for incomplete take up of social programmes (Currie, 2004)
Empirical Applications
Black et al (2003), Currie (2004)
Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), 1996