Indicator targeting in a political economy: Leakier can be better

Jonah B. Gelbach and Lant Pritchett

Journal of Economic Policy Reform, 2001, vol. 4, issue 2, 113-145

Abstract: In LDCs, policymakers sometimes cannot observe income among the poor. One oft-proposed approach to redistribution is indicator targeting: targeting transfers on corrrelations between income and “indicators” like geography, gender, or occupation. We build a simple model in which maximizing poverty reduction from a fixed budget requires indicator targeting. Because insurance motives drive political support for redistribution, the budget depends on the degree of targeting. When middle income agents receive targeted transfers sufficiently rarely, introducing targeting reduces poor agents’ welfare. The converse holds when middle income agents receive targeted transfers sufficiently rarely, i.e. if the redis-tributive bucket is sufficiently leaky.

Date: 2001
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DOI: 10.1080/13841280008523416

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