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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.

Suggested Citation

  • Ramses H. Abul Naga, 1995. "The Allocation of Benefits underUncertainty: A Decision-Theoretic Framework," STICERD - Distributional Analysis Research Programme Papers 10, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    • Handle: RePEc:cep:stidar:10
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    References listed on IDEAS

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    1. 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.
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    6. Jean‐Yves Duclos, 1995. "On Equity Aspects Of Imperfect Income Redistribution," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 41(2), pages 177-190, June.
    7. 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.
    8. 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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