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The allocation of benefits under uncertainty: a decision-theoretic framework

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  • Abul Naga, Ramses H.

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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  • Abul Naga, Ramses H., 2003. "The allocation of benefits under uncertainty: a decision-theoretic framework," Economic Modelling, Elsevier, vol. 20(4), pages 873-893, July.
  • Handle: RePEc:eee:ecmode:v:20:y:2003:i:4:p:873-893
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    1. Duclos, J.Y., 1993. "Poverty Alleviation and Redistributive Costs," Papers 9332, Laval - Recherche en Politique Economique.
    2. 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 179-192, May.
    3. 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 249-261, March.
    4. Besley, Timothy, 1990. "Means Testing versus Universal Provision in Poverty Alleviation Programmes," Economica, London School of Economics and Political Science, vol. 57(225), pages 119-129, February.
    5. 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.
    6. 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.
    7. Glewwe, P., 1990. "Efficient Allocation Of Transfers To The Poor: The Problem Of Unobserved Household Income," Papers 70, World Bank - Living Standards Measurement.
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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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