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Take it or Leave it: Take-up, Optimal Transfer Programs, and Monitoring

This paper studies the optimal income redistribution and optimal monitoring when disability benefits are intended for disabled people but when some able agents with high distaste for work mimic them (type II errors). Labor supply responses are at the extensive margin and endogenous take-up costs may burden disabled recipients (because of either a reputational externality caused by cheaters or a snowball effect). Under paternalistic utilitarian preferences that do not compensate for distaste for work, inactive disabled recipients should obtain strictly lower consumption than disabled workers. The cost of monitoring supports adoption of an Earned Income Tax Credit. However, and surprisingly, with or without take-up costs, even if perfect monitoring is costless, it proves optimal to have type II errors. These results are robust to a utilitarian criterion. The paper provides numerical simulations calibrated on U.S. data.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3018.

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Date of creation: 2010
Date of revision:
Handle: RePEc:ces:ceswps:_3018
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  1. Pierre Pestieau & Maria Racionero, 2009. "Optimal redistribution with unobservable disability: Welfarist versus non-welfarist social objectives," Post-Print halshs-00754340, HAL.
  2. Hugo Benitez-Silva & Moshe Buchinsky & Hiu Man Chan & Sofia Cheidvasser & John Rust, 2000. "How Large is the Bias is Self-Reported Disability?," NBER Working Papers 7526, National Bureau of Economic Research, Inc.
  3. Henrik Jacobsen Kleven & Wojciech Kopczuk, 2008. "Transfer Program Complexity and the Take Up of Social Benefits," NBER Working Papers 14301, National Bureau of Economic Research, Inc.
  4. Cremer Helmuth & Lozachmeur Jean-Marie & Pestieau Pierre, 2007. "Disability Testing and Retirement," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-34, February.
  5. repec:oup:restud:v:38:y:1971:i:114:p:175-208 is not listed on IDEAS
  6. repec:oup:qjecon:v:114:y:1999:i:1:p:1-35 is not listed on IDEAS
  7. repec:oup:qjecon:v:118:y:2003:i:3:p:815-842 is not listed on IDEAS
  8. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
  9. Ravi Kanbur & Jukka Pirttilä & Matti Tuomala, 2004. "Non-Welfarist Optimal Taxation and Behavioral Public Economics," Working Papers 0433, University of Tampere, School of Management, Economics.
  10. Schokkaert, Erik & Van de gaer, Dirk & Vandenbroucke, Frank & Luttens, Roland Iwan, 2004. "Responsibility sensitive egalitarianism and optimal linear income taxation," Mathematical Social Sciences, Elsevier, vol. 48(2), pages 151-182, September.
  11. Besley, Timothy & Coate, Stephen, 1992. "Understanding welfare stigma: Taxpayer resentment and statistical discrimination," Journal of Public Economics, Elsevier, vol. 48(2), pages 165-183, July.
  12. Jianting Hu & Kajal Lahiri & Denton R. Vaughan & Bernard Wixon, 2001. "A Structural Model Of Social Security'S Disability Determination Process," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 348-361, May.
  13. Jon Harkness, 1993. "Labour Force Participation by Disabled Males in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 26(4), pages 878-89, November.
  14. Angeletos, George-Marios & Alesina, Alberto, 2005. "Fairness and Redistribution," Scholarly Articles 4553009, Harvard University Department of Economics.
  15. Sheshinski, E. & Diamond, P., 1992. "Economic Aspects of Optimal Disability Benefits," Working papers 92-5, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers W98/18, Institute for Fiscal Studies.
  17. Dirk Van de gaer & Marc Fleurbaey & Walter Bossert, 1999. "Responsibility, talent, and compensation: A second-best analysis," Review of Economic Design, Springer, vol. 4(1), pages 35-55.
  18. Hugo Benitez-Silva & Moshe Buchinsky & John Rust, 2005. "How Large are the Classification Errors in the Social Security Disability Award Process?," Department of Economics Working Papers 05-02, Stony Brook University, Department of Economics.
  19. Robin Boadway & Katherine Cuff, 1999. "Monitoring Job Search as an Instrument for Targeting Transfers," Working Papers 982, Queen's University, Department of Economics.
  20. repec:oup:qjecon:v:117:y:2002:i:3:p:1039-1073 is not listed on IDEAS
  21. Boadway, Robin & Marceau, Nicolas & Sato, Motohiro, 1999. "Agency and the design of welfare systems," Journal of Public Economics, Elsevier, vol. 73(1), pages 1-30, July.
  22. Maurice Marchand & Pierre Pestieau & María Racionero, 2003. "Optimal redistribution when different workers are indistinguishable," Canadian Journal of Economics, Canadian Economics Association, vol. 36(4), pages 911-922, November.
  23. Stephen Pudney & Ruth Hancock & Holly Sutherland, 2006. "Simulating the Reform of Means-tested Benefits with Endogenous Take-up and Claim Costs," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(2), pages 135-166, 04.
  24. Katherine Cuff, 2000. "Optimality of workfare with heterogeneous preferences," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 149-174, February.
  25. Kroft, Kory, 2008. "Takeup, social multipliers and optimal social insurance," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 722-737, April.
  26. Ted O'Donoghue & Matthew Rabin, 2003. "Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes," American Economic Review, American Economic Association, vol. 93(2), pages 186-191, May.
  27. repec:oup:restud:v:68:y:2001:i:1:p:205-29 is not listed on IDEAS
  28. Salanie, Bernard, 2002. "Optimal demogrants with imperfect tagging," Economics Letters, Elsevier, vol. 75(3), pages 319-324, May.
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