Encouragement and distortionary effects of conditional cash transfers

Bryan, Gharad, Chowdhury, Shyamal, Mobarak, Ahmed Mushfiq, Morten, Melanie and Smits, Joeri (2023) Encouragement and distortionary effects of conditional cash transfers. Journal of Public Economics, 228. ISSN 0047-2727

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Abstract

Conditional cash transfer (CCT) programs aim to reduce poverty or advance social goals by encouraging desirable behavior that recipients under-invest in. An unintended consequence of conditionality may be the distortion of recipients’ behavior in ways that lower welfare. We first illustrate a range of potential distortions arising from CCT programs around the world. We then show that in the simple case where a CCT causes low return participants to select into a behavior, and social returns and private perceived returns are aligned, transfer size plays an important role: the larger the transfer, the stronger the distortion becomes, implying that (i) there is an optimal transfer size for such CCTs, and (ii) unconditional cash transfers (UCTs) may be better than CCTs when the transfer amount is large. We provide empirical evidence consistent with these claims by studying a cash transfer program conditional on seasonal labor migration in rural Indonesia. In line with theory, we show that when the transfer size exceeds the amount required for travel expenses, distortionary effects dominate and migration earnings decrease.

Item Type:	Article
Official URL:	https://www.sciencedirect.com/journal/journal-of-p...
Additional Information:	© 2023 Elsevier B.V.
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	J - Labor and Demographic Economics > J4 - Particular Labor Markets > J48 - Public Policy I - Health, Education, and Welfare > I3 - Welfare and Poverty > I38 - Government Policy; Provision and Effects of Welfare Programs O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O15 - Human Resources; Human Development; Income Distribution; Migration
Date Deposited:	06 Nov 2023 11:18
Last Modified:	25 Apr 2024 16:45
URI:	http://eprints.lse.ac.uk/id/eprint/120638

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