The targeting benefit of conditional cash transfers

Conditional cash transfers (CCTs) are a popular type of social welfare program that make payments to households conditional on human capital investments in children. From a targeting perspective, compared to unconditional cash transfers (UCTs), CCTs are costly because they exclude some low-income households as access is tied to normal investments in children. However, we argue that conditionalities on children’s school enrollment offer an unexplored targeting benefit over UCTs: CCTs target money to households who forgo a discrete amount of child income. We show that the size of the targeting benefit relative to the targeting cost of CCTs is directly related to the consumption differences between schooling and non-schooling households and two elasticities already popular in the literature: the income effect of a UCT and the price effect of a CCT. We estimate these elasticities for a large CCT program in rural Mexico, Progresa, using variation in transfers to younger siblings to identify income effects. In this setting, we find that the targeting benefit is a similar magnitude to the cost of excluding some low-income households; this implies that 33% of the Progresa budget should go to a CCT over a UCT based on targeting grounds alone.