Author: B. Jonah Gelbach

Publisher:

Published: 1999

Total Pages:

ISBN-13:

October 1995 Attempts to achieve more for the poor through the use of indicator targeting may in fact mean less for the poor. The efficient use of a fixed budget for poverty reduction may require targeting. However, the use of indicator targeting, using fixed characteristics that are correlated with poverty to determine the distribution of expenditures, will tend to reduce the budget. Ignoring the budget reducing effects can reduce the welfare of the poor as they receive a greater share of a shrinking budget. There are political economy limits to not only the scope but the form of redistribution. Proposals aimed at improving the welfare of the poor often include indicator targeting, in which non-income characteristics (such as race, gender, or land ownership) that are correlated with income are used to target limited funds to groups likely to include a concentration of the poor. Previous work shows that efficient use of a fixed budget for poverty reduction requires such targeting, either because agents' income cannot be observed or to reduce distortionary incentives arising from redistributive interventions. Inspite of this, Gelbach and Pritchett question the political viability of targeting. After constructing a model that is basically an extension of Akerlof's 1978 model of tagging, they derive three main results: * Akerlof's result continues to hold: that, ignoring political considerations, not only will targeting be desirable but recipients of the targeted transfer will receive a greater total transfer than they would if targeting were not possible. * A classical social-choice analysis -- in which agents vote simultaneously about the level of taxation and the degree of targeting -- shows that positive levels of targeted transfers will not exist in equilibrium (an unsurprising finding, given Plott's 1968 theorem). It also shows that a voting equilibrium often will exist with no targeting but with non-zero taxation and redistribution. * In a game in which the policymaker chooses the degree of targeting while voters choose the level of taxation, the redistributive efficiency gains from tagging may well fail to outweigh the resulting reduction in funds available for redistribution. These results may be extended readily to account for altruistic agents. Gelbach and Pritchett stress that even when these results hold, the alternative to targeted transfers -- a universally received lump-sum grant financed through a proportional tax -- will nonetheless be supported politically and will be quite progressive relative to the pretransfer income distribution. This paper -- a product of the Poverty and Human Resources Division, Policy Research Department -- is part of a larger effort in the department to understand the role of targeting in poverty alleviation efforts.