Benefit Incidence with Incentive Effects, Measurement Errors and Latent Heterogeneity: A Case Study for China

Martin Ravallion and Shaohua Chen

No 21111, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In what is probably the largest cash transfer program in the world today China’s Dibao program aims to fill all poverty gaps. In theory, the program creates a poverty trap, with 100% benefit withdrawal rate (BWR). But is that what we see in practice? The paper proposes an econometric method of estimating the mean BWR allowing for incentive effects, measurement errors and correlated latent heterogeneity. Under the method’s identifying assumptions, a feasible instrumental variables estimator corrects for incentive effects and measurement errors, and provides a bound for the true value when there is correlated incidence heterogeneity. The results suggest that past methods of assessing benefit incidence using either nominal official rates or raw tabulations from survey data are deceptive. The actual BWR appears to be much lower than the formal rate, and is also lower than the rate implied by optimal income tax models for poverty reduction. The paper discusses likely reasons based on qualitative observations from field work. The program’s local implementation appears to matter far more than incentives implied by its formal rules.

JEL-codes: H22 I32 I38 O12 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-cna, nep-cta, nep-lma, nep-ltv and nep-tra
Note: DEV PE
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Citations: View citations in EconPapers (15)

Published as Ravallion, Martin & Chen, Shaohua, 2015. "Benefit incidence with incentive effects, measurement errors and latent heterogeneity: A case study for China," Journal of Public Economics, Elsevier, vol. 128(C), pages 124-132.

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