Money is not enough: Unintended negative effects of cash transfer design
Juan Carlos Palacios, Denis de Crombrugghe & Franziska Gassmann
#2022-038
The effectiveness of cash transfer programs to foster social mobility in
the medium and long run is still unclear. Using a RDD we found that
after six years of exposure to the Ecuadorean cash transfer, living
conditions of beneficiaries are worse off than non-beneficiaries. We
argue that it is the mechanism to evaluate continuity that incentivizes
households to remain poor. Continuity is evaluated every 4-6 years based
solely on a proxy-means score and not on whether households are on a
path towards escaping poverty. Furthermore, households do not know how
the score pis estimated and their proximity to the cutoff. This creates
uncertainty on the side of beneficiaries, who take long-term suboptimal
decisions to maximize their short-term utility. We also estimate the
effect of the old-age pension’s branch of the program, whose
beneficiaries do not face uncertainty about their continuity, finding no
negative effects for that branch.
Keywords: cash transfer, program design, long-term impact, proxy-means-test, Ecuador
JEL Classification: I38, H53, C14, D81