The Digital Revolution and Targeting Public Expenditure for Poverty Reduction

The Digital Revolution is often argued as providing solutions to the problems of targeting of public expenditure for poverty reduction. This paper revisits the fundamentals of the theory of targeting to pinpoint the possible impacts of the digital revolution on the three dimensions of fine targeting highlighted there—information costs, high implicit marginal tax rates, and political economy. It is argued that while the digital revolution may reduce information costs, although the exact nature of its impact needs to be carefully considered, it does not necessarily address all issues and indeed in some situations may worsen the tradeoffs. Thus the object of this paper is to sound a note of caution. The hype around the digital revolution needs to be duly mitigated by the lessons of the conventional literature on targeting of anti-poverty transfers.