The Imperfections of Conditional Programs and the Case for Universal Basic Income

Luis Guimarães and Diogo Lourenço

MPRA Paper from University Library of Munich, Germany

Abstract: How costly are the imperfections of conditional welfare programs? Should we replace these programs, in whole or in part, with a Universal Basic Income (UBI)? We answer these questions using a general equilibrium model with incomplete markets, accounting for three overlooked imperfections of real-life conditional programs: incomplete take-up, illegitimate transfers, and administrative costs. We find that these imperfections, especially incomplete take-up, significantly reduce welfare. Also, diverting half of the current welfare expenditure to finance a UBI maximizes welfare by mitigating distortions and reaching those in the dead angle of conditional programs. Conditional programs and UBI are, thus, complementary policy instruments.

Keywords: Universal Basic Income; Welfare System; Take-up; Illegitimate Transfers; Administrative Costs; Labor Market Flows. (search for similar items in EconPapers)
JEL-codes: D52 E21 H24 J21 J64 (search for similar items in EconPapers)
Date: 2024
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