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The Allocation of Benefits underUncertainty: A Decision-Theoretic Framework

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  • Ramses H. Abul Naga

Abstract

We consider the problem of targeting benefits when the incomes of families are not accurately observable by the public authorities. By income uncertainty it is meant that the decision-maker cannot ascertain an applicant's income, but that he can assign probabilities with respect to the level of his resources. A decision-theoretic framework is used in order to analyze the decision to grant a benefit of fixed size. The derived decision rule consists of balancing the expected social cost of denying assistance to a person in need (type-I error) against that of granting a benefit to a non-poor (type-II error). Thus, when the cost of type-I errors are on the rise, or those of type-II errors fall, it becomes more desirable socially to increase population coverage of the benefit programme. Empirical illustrations are provided using a sample from the PSID.

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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Distributional Analysis Research Programme Papers with number 10.

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Date of creation: May 1995
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Handle: RePEc:cep:stidar:10

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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Keywords: Poverty; imperfect information; allocation of benefits;

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References

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  1. Ramses H. Abul Naga, 1994. "Identifying the Poor: A Multiple Indicator Approach," STICERD - Distributional Analysis Research Programme Papers 09, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  2. Besley, Timothy, 1990. "Means Testing versus Universal Provision in Poverty Alleviation Programmes," Economica, London School of Economics and Political Science, vol. 57(225), pages 119-29, February.
  3. Duclos, J.Y., 1993. "Poverty Alleviation and Redistributive Costs," Papers 9332, Laval - Recherche en Politique Economique.
  4. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-61, March.
  5. Glewwe, P., 1990. "Efficient Allocation Of Transfers To The Poor: The Problem Of Unobserved Household Income," Papers 70, World Bank - Living Standards Measurement.
  6. Ravallion, Martin & Chao, Kalvin, 1989. "Targeted policies for poverty alleviation under imperfect information: Algorithms and applications," Journal of Policy Modeling, Elsevier, vol. 11(2), pages 213-224.
  7. Immonen, Ritva, et al, 1998. "Tagging and Taxing: The Optimal Use of Categorical and Income Information in Designing Tax/Transfer Schemes," Economica, London School of Economics and Political Science, vol. 65(258), pages 179-92, May.
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Cited by:
  1. Frank Krysiak, 2009. "Risk Management as a Tool for Sustainability," Journal of Business Ethics, Springer, vol. 85(3), pages 483-492, April.

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