Political economy of transfers
The Political Economy of Targeted Safety Nets. This is a paper for the "Safety Nets" course organized by the World Bank (principally by Margaret Grosh) and is also available as Social Protection Discussion Paper #501.
Is More for the Poor Less for the Poor? The Politics of Means-Tested Targeting. with Jonah Gelbach. Standard economic analysis suggests that when the budget for redistribution is fixed, income transfers should be targeted to (i.e. means-tested for) those most in need. However, both political scientists and economists long have recognized the possibility that targeting might undermine political support for redistribution. We formalize this recognition, developing a simple economy in which both non-targeted (universally received) and targeted transfers are available for use by the policymaker. When the budget can be taken as fixed, full use of the targeted transfer is optimal. However, when we allow the budget to be determined through majority voting (with the policymaker choosing the share of the budget to be spent on each type of transfer), the optimal degree of targeting is zero. More strikingly, we show that if the policymaker naively ignores political considerations, the resulting equilibrium actually minimizes not only social welfare, but also the welfare of poor and middle income agents. Thus political considerations cannot generally be regarded as simply another ``small'' extension of standard models. As a result, future models and actual policies advocating the use of targeting through means-testing should account explicitly for the role of political considerations.
Indicator Targeting in a Political Economy: Leakier can be better. with Jonah Gelbach. In developing country environments means tested transfers are often constrained by the fact that income is no administratively observable. One way around that problem is to condition transfers on some relatively fixed and observable characteristic that is associated with income. However, if the demand for transfers is a combination of demand for redistribution of income across households and in part a demand for insurance (an intertemporal redistribution of income from rich to poor states) then (at least under some conditions) indicator targeting will receive less political support that a more "leaky" and less "well targeted" program precisely because conditioning the transfer on the indicator means that people who do not have the indicator characteristic fail to receive the transfer even in bad states.