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An Agency Model of Welfare and Disability Assistance

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Welfare programs including disability benefits have been considered as an efficient way of delivering transfers to the needy. This paper addresses the importance of administrative cost of welfare systems by focusing on an agency problem arising between the government and social workers, whose job is to use tagging to determine eligibility for welfare benefits. Tagging is imperfect in that it involves type I and II errors, and its accuracy depends on the effort of the social workers,which is private information. To induce positive effort, the government needs to monitor the social workers using a costly auditing procedure. Using the framework of optimal non-linear income taxation, we characterize second-best redistribution policies when the government can operate a welfare program alongside a negative income tax. The welfare program contains a disability benefit and a general welfare component. Welfare applicants that are tagged receive the disability benefit, while those who are untagged are accepted for general welfare benefits. It is emphasized that whether or not general welfare recipients, who may be the able or disabled, should be allowed to work is substantially affected by the nature of the administration cost of welfare programs and by indivisibilities that may exist in labor supply. Our ultimate objective is to contribute to the debate concerning transferring income to the poor using welfare programs versus negative income tax systems. This involves trading off the costs of administering welfare relative to the benefits of tagging. Les programmes d'aide sociale comportant des transferts plus élevés pour les inaptes au travail sont géenéralement considérés comme des systèmes efficaces pour aider les plus démunis. Ce texte met en lumière l'importance des coûts d'administration de ces programmes par une modélisation explicite du problème d'agence entre le gouvernement et les travailleurs sociaux, le rôle des ces derniers étant de déterminer l'éligibilité ("étiquetage") des postulants aux divers transferts. L'étiquetage est imparfait. Des erreurs de types I et II sont en effet commises, le nombre d'erreurs diminuant lorsque l'effort non-observable des travailleurs sociaux augmente. Le gouvernement doit donc inciter les travailleurs sociaux à l'effort, ce qui ne peut être accompli que par de coûteuses vérifications et des sanctions. Utilisant le cadre de la théorie de la taxation optimale non-linéaire du revenu, nous caractérisons les politiques redistributives de second rang lorsque le gouvernement opère un programme d'aide sociale et un système d'impôt négatif sur le revenu. Les bénéficiaires d'aide sociale reçoivent le transfert de base ou, s'ils sont étiquetés comme tels, le transfert plus élevé destiné aux inaptes au travail. Nous nous demandons s'il est optimal de permettre aux bénéficiaires ne recevant que le transfert de base (qui sont généralement aptes à travailler, mais qui peuvent également être inaptes puisque des erreurs d'étiquetage surviennent) de travailler. Nous démontrons que cela dépend de la nature des coûts d'administration du programme d'aide sociale et des indivisibilités de l'offre de travail. Notre objectif est de contribuer au débat sur l'approche la plus efficace (programme d'aide sociale versus impôt négatif sur le revenu) pour venir en aide aux démunis. Cela dépend ultimement des coûts d'administration du programme d'aide sociale et des avantages que procure l'étiquetage.

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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 46.

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Length: 35 pages
Date of creation: Apr 1997
Handle: RePEc:cre:crefwp:46
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  1. Kanbur, Ravi & Keen, Michael & Tuomala, Matti, 1994. "Optimal non-linear income taxation for the alleviation of income-poverty," European Economic Review, Elsevier, vol. 38(8), pages 1613-1632, October.
  2. Stiglitz, Joseph E., 1987. "Pareto efficient and optimal taxation and the new new welfare economics," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 15, pages 991-1042 Elsevier.
  3. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  4. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-261, March.
  5. Cremer, Helmuth & Gahvari, Firouz, 1996. "Tax evasion and the optimum general income tax," Journal of Public Economics, Elsevier, vol. 60(2), pages 235-249, May.
  6. Parsons, Donald O., 1996. "Imperfect 'tagging' in social insurance programs," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 183-207, October.
  7. Diamond, Peter & Sheshinski, Eytan, 1995. "Economic aspects of optimal disability benefits," Journal of Public Economics, Elsevier, vol. 57(1), pages 1-23, May.
  8. Timothy Besley & Stephen Coate, 1995. "The Design of Income Maintenance Programmes," Review of Economic Studies, Oxford University Press, vol. 62(2), pages 187-221.
  9. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
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