A Dynamic Incentive-Based Argument for Conditional Transfers
We compare the long-run e ects of replacing unconditional transfers to the poor by transfers conditional on the education of children. Unlike the Mirrlees income taxation model, the distribution of skill evolves endogenously. Human capital accumulation follows the Freeman-Ljungqvist-Mookherjee-Ray OLG model with missing capital markets and dynastic bequest motives. Conditional transfers (funded by taxes on earnings of the skilled) are shown to induce higher long run output per capita and (both utilitarian and Rawlsian) welfare, owing to their superior effect on skill accumulation incentives. The result is established both with two skill levels, and a continuum of occupations.
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