6 Transfers

Question 1

Full income vs. money income

Answer 1

Proposed by Nicholas Barr. Full income includes all resources contributing to welfare, such as earned income, home production, and public goods. Money income only accounts for direct earnings.

Question 2

Poverty line

Answer 2

The minimum income level required to meet basic needs. Individuals below this threshold are classified as poor

Question 3

Poverty headcount

Answer 3

The proportion of the population living below the poverty line

Question 4

Poverty gap

Answer 4

Measures the average shortfall of the poor’s income from the poverty line, reflecting the depth of poverty (and not just a simple snapshot of poverty prevalence, which is the headcount ratio). But doesn’t account for inequality among the poor

Poverty gap squared - captures severity of poverty (sensitive to the distribution among the poor) - larger poverty gaps have a higher weight

Question 5

Absolute vs. relative poverty

Answer 5

Absolute poverty is defined by a fixed threshold (e.g., $2.15/day in PPP terms). Barr: too low to cover her basic needs and remain healthy. Normally calorie-based food poverty line PLUS essential non-food goods

Relative poverty depends on societal standards (e.g., earning less than 60% of median income). Barr: cannot participate in the sorts of activities pursued by the generality of the population. In the U.K., a ‘widely watched’ measure is the proportion of individuals with household incomes below 60 percent of the contemporary median

Question 6

Multidimensional Poverty Index

Answer 6

A composite measure capturing multiple deprivations in health, education, and living standards

Question 7

Poverty persistence

Answer 7

Long-term poverty due to structural barriers or lack of opportunities, often associated with poverty traps

Question 8

Redistribution

Answer 8

Policy measures, such as taxes and transfers, aimed at reducing income inequality

Question 9

Work disincentives

Answer 9

Reduced motivation to work caused by welfare programmes that reduce benefits as income rises.

Question 10

Implicit marginal income tax

Answer 10

The effective tax rate on additional earnings due to benefit reductions and taxation, which can discourage additional work

Question 11

Benefit reduction rate

Answer 11

rate at which welfare benefits decrease as recipients’ income increases

Question 12

Benefit replacement rate

Answer 12

ratio of welfare benefits to previous earnings, influencing individuals’ decisions to return to work

Question 13

Means-tested benefits

Answer 13

allocated based on recipients’ income levels

Question 14

Indicator-tested benefits

Answer 14

Benefits allocated using proxies like household size or geographical location. Simplifies targeting (eg. compared to means testing) but risk excluding deserving individuals or non-poor households

Question 15

Ordeal mechanisms

Answer 15

Welfare designs that impose minimal hardships (e.g., long application processes or mandatory participation in community activities) to encourage only those genuinely in need to apply. Discourages fraud but may exclude eligible individuals with limited resources

Question 16

Conditional cash transfers

Answer 16

programmes providing monetary assistance to poor households, conditional on meeting specific criteria like school attendance or health checkups

Question 17

Absolute vs relative poverty pros and cons

Answer 17

Absolute poverty is useful for global comparisons, while relative poverty reflects inequality and social exclusion in developed economies.

Question 18

UBI pros/cons

Answer 18

UBI provides a fixed amount of money to all individuals, regardless of income or need. This approach is inclusive, simple to implement, and avoids the STIGMA associated with means-tested benefits, but it comes with high social costs and can be inefficient in allocating resources to those who need them most

Question 19

Targeted welfare programs pros/cons

Answer 19

more efficient, maximizing the impact of limited funds, but they are often more complex to administer, with higher administrative costs and the risk of excluding eligible recipients due to errors or barriers in the application process

Question 20

Poverty traps

Answer 20

Due to structural barriers eg. lack of education or credit access. Breaking requires investment in human capital (education and health) and access to financial resources
Eg. Once in a trap, small improvements will have no structural effects

Question 21

Capabilities

Answer 21

Amartya Sen - defining wellbeing as “the capability to realise one’s full potential in all dimensions of a human being’s life”

Question 22

Income vs consumption

Answer 22

consumption-based measures are more common in developing economies (agriculture and subsistence economies/ informal employment); income measures more common in richer economies (given the relative ease of measuring each in different settings)

Question 23

Efficiency vs equity in welfare

Answer 23

Government may intervene to correct “market failures” that may put people at risk of poverty (efficiency argument) as well as the “unfairness” of having people in poverty ( equity argument)

Question 24

! Ways government can intervene

Answer 24

1. to help people “smooth consumption” across their life cycle (efficiency + equity)
2. to help people with “risk sharing” across unexpected events (efficiency + equity)
3. to overcome the consequences of endowments/assets poverty and the downward spiral from limited smoothing or ”shocks” (equity but could also help with efficiency)

Question 25

Costs of welfare programs

Answer 25

Arthur Okun famously argued that welfare programmes constituted a ‘leaky bucket’

– administrative costs of programmes
– need to tax to finance programmes (with efficiency consequences, like deadweight loss)
– behaviours of those receiving may be affected also — moral hazard could make programmes more costly

Question 26

Challenges in designing welfare programs

Answer 26

• effective targeting of beneficiaries: how to identify who are the poor and needy to minimize inefficient spending and maximize poverty impact
• effective provision (admin costs): how to ensure admin costs remain low and maintain balance between targeting and admin costs (to minimize the overall costs on those paying/taxed)
• distortionary effects: could access to state benefits reduce incentives to work or save? (generating a culture of dependency?) ( moral hazard )

Question 27

Types of cash benefits to reduce poverty

Answer 27

– income (means) tested benefits
– indicator (proxy means) tested benefits
– universal benefits
– self-targeted benefits (‘ordeal mechanism’)
– improving outside options

Question 28

Why are poor people poor?

Answer 28

1. limited opportunities based on their “endowments” - not enough assets to start with, so need eg. microfinance
2. market failure - market inefficiencies through poorly functioning markets - eg. 1) extreme events eg. droughts/floods mean they fall into a poverty trap unless they have insurance (imperfect information, moral hazard, and adverse selection means they are not served); 2) lack capital to invest in education, because investment requires collateral which they don’t have

Solving market failures improve both equity and efficiency!

Question 29

Solutions without efficiency-equity tradeoff

Answer 29

1. Helping (poor) people with savings, such as through supporting pension markets or the provision of state pensions (Barr Ch 7)
2. Improving insurance coverage of the poor (e.g. safety nets, microinsurance, social insurance, unemployment benefit, sickness and disability benefits, government supported health insurance)
3. Overcoming credit constraints for the poor. Micro-credit? Transfers or tax credits?

Question 30

Nutritional poverty trap

Answer 30

Banerjee and Duflo
- A poverty trap might arise, if what the poor workers get in wages is less than what they need to sustain their nutritional caloric intake.
- They will descend into a vicious circle towards lower and lower nutritional intake

Question 31

Why should governments intervene to fight poverty?

Answer 31

(1) To help people “smooth consumption” across their life cycle (efficiency issues, linked to poor credit and savings markets, needing pensions is also a negative externality! + equity)
(2) To help people with “risk sharing” against unexpected events (efficiency issues, linked to poorly functioning insurance + equity)
(3) To overcome the consequences of endowments/assets poverty and downward spiral from limited smooth or ‘shocks’ (equity argument, but could also help with overcoming efficiency issues (e.g. now they have collateral for credit – getting people in a position to take part in poorly functioning markets)

Question 32

Moral hazard

Answer 32

lack of incentive to guard against risk where one is protected from its consequences, e.g. by insurance, or in 2008 banks choosing to take excess risk because they would be bailed out by the gov

Question 33

Unemployment trap and evidence

Answer 33

unemployed person has little financial incentive to seek work because of the replacement rate RR = income when unemployed / post tax and transfer income in work

Evidence:
1. Howell and Rehm - despite large differences in length of UI, no increased aggregate unemployment. Orthodox argument misses:
(1) Most workers experience dis-utility from unemployment and utility from employment so may choose to work even if the RR > 1.
(2) workers recognise the ‘scarring effects’ of unemployment on future income, e.g. loss of skills, networks, seniority/tenure so look for work
2. Gruber adds: UI allows for more efficient job search

BUT US in 2012 - high Implicit Marginal Income Tax (95%) means unemployment trap

Question 34

Pros and cons of means testing

Answer 34

Pros
1. can be well-targeted

Cons
1. admin costs
2. Hard to measure
3. Disincentivises work and creates moral hazard - if you work you lose benefits (can be solved by gradual phase out)
4. stigma may cause incomplete uptake

Question 35

Pros and cons of indicator (proxy means) testing

Answer 35

Pros
1. Targeting can be good - “Ideal” target indicator: (i) unchangeable proxy (e.g. gender, age), (ii) is good proxy for poverty. (*) But if not, “needy” may be left out.
2. Cheaper admin
3. no work disincentives

Cons
1. Usually imperfect indicator eg. single mother

Question 36

Pros and cons of self-targeted benefits with ordeal mechanism

Answer 36

Eg. in-kind not cash payments (food-vouchers), social housing instead of rent support, work or training (‘workfare’). Also Conditional Cash Transfers (CCT). Can lower admin costs due to limited verification

Cons
1. Currie - costs may be too high for the poor
2. Poor may be unable to work. Or stigma

Question 37

Pros and cons of increasing outside options

Answer 37

The carrot approach eg. Training programmes, Subsidies for work (e.g. Earner Income Tax Credit in the US), Child care assistance, etc.

Pros - inherently self-targeted!

Question 38

What welfare programs are more suited to LDCs?

Answer 38

1. Less admin capacity
2. Less information for means-targeting
3. More informal sector

Thus self-targeted ordeal mechanisms and outside options make more sense

Question 39

Conditional cash transfers

Answer 39

Means tested, and given to families whose kids attend school and go to doctor visits eg. Opportunidades Mexico

Question 40

India successful welfare program

Answer 40

NREGA - minimum wage job, guaranteed 100 days, helped families who experience shock to smooth consumption (social insurance and safety net). Self-targeted (ordeal mechanism), decreased poverty, over 800m beneficiaries, acted as a de facto minimum wage. Zimmerman - take up during economic shocks shows the social protection role of program