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Evaluating Transfer Programs Within A General Equilibrium Framework

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  • Coady, David P.
  • Harris, Rebecca Lee

Abstract

We set out a general equilibrium model for the evaluation of a domestically financed transfer program, which helps to combine the results from a computable general equilibrium model with disaggregated household data. We separate the indirect welfare impact into three components: (1) the redistribution effect arising from the need to finance programs, (2) the reallocative effect arising from the transfer of resources between households with different “tax propensities,” and (3) the distortionary effect arising from the need to use distortionary finance instruments. We show how all these effects can be usefully subsumed within one parameter, namely, the cost of public funds. Using a Mexican cash transfer program as an illustration, we use the approach to show that the substantial welfare gains that result from the switch from universal food subsidies to targeted cash transfers reflect both the improved targeting efficiency of the latter as well as a relaxation of the trade-off between equity and efficiency objectives when designing tax systems. More generally, the indirect costs of finance can be substantially lowered when such programs are combined with appropriate tax reforms.

Suggested Citation

  • Coady, David P. & Harris, Rebecca Lee, 2001. "Evaluating Transfer Programs Within A General Equilibrium Framework," FCND Discussion Papers 16412, CGIAR, International Food Policy Research Institute (IFPRI).
    • Handle: RePEc:ags:fcnddp:16412
    DOI: 10.22004/ag.econ.16412
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    References listed on IDEAS

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    1. David Coady & Jean Dreze, 2000. "Commodity Taxation and Social Welfare: The Generalised Ramsey Rule," Working papers 87, Centre for Development Economics, Delhi School of Economics.
    2. David Coady, 1997. "Agricultural Pricing Policies in Developing Countries: An Application to Pakistan," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(1), pages 39-57, January.
    3. David Coady & Jean Drèze, 2000. "Commodity Taxation and Social Welfare: The Generalised Ramsey Rule," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 27, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    4. Coady, David & Dreze, Jean, 2000. "Commodity taxation and social welfare: the generalised Ramsey rule," LSE Research Online Documents on Economics 6651, London School of Economics and Political Science, LSE Library.
    5. Dreze, Jean & Stern, Nicholas, 1987. "The theory of cost-benefit analysis," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 14, pages 909-989, Elsevier.
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