Working Paper: NBER ID: w26339
Authors: Martín Caruso; Sebastián Galiani; Federico Weinschelbaum
Abstract: Strategies based on growth and inequality reduction require a long-run horizon, and this paper therefore argues that those strategies need to be complemented by poverty alleviation programs. With regards to such programs, informality in Latin America and the Caribbean is a primary obstacle to carry out means testing income-support programs, and countries in the region have therefore mostly relied on proxy means testing mechanisms. This paper studies the relative effectiveness of these and other mechanisms by way of a formal model in which workers choose between job opportunities in the formal and informal sectors. Although the means testing mechanism allows for a more pro-poor design of transfers, it distorts labor decisions made by workers. On the other hand, (exogenous) proxy means testing does not cause distortions, but its pro-poor quality is constrained by the power of observable characteristics to infer income levels. However, since taxation is necessary to fund programs, redistribution becomes less effective, especially for programs other than means testing. The paper concludes by discussing the implications of these results for the design of more efficient targeting programs.
Keywords: Poverty; Inequality; Growth; Informality; Latin America
JEL Codes: I38; J38; O54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic growth (O49) | poverty reduction (I32) |
| 1% increase in mean consumption (D12) | poverty rate (I32) |
| inequality (D63) | poverty reduction (I32) |
| means testing programs (I38) | labor market decisions (J29) |
| proxy means testing (Y60) | labor market decisions (J29) |
| means testing (I38) | targeting the poor (I32) |