Encouragement and distortionary effects of conditional cash transfers

Gharad Bryan, Shyamal Chowdhury, Ahmed Mushfiq Mobarak, Melanie Morten and Joeri Smits

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: conditional cash transfers; distortion; seasonal migration (search for similar items in EconPapers)
JEL-codes: I38 J48 O15 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2023-12-01
New Economics Papers: this item is included in nep-sea
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Published in Journal of Public Economics, 1, December, 2023, 228. ISSN: 0047-2727

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