Money is not enough: Unintended negative effects of cash transfer design

Juan Carlos Palacios, Denis de Crombrugghe & Franziska Gassmann


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

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