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Why may government transfers to the poor have modest effects on reducing rural inequality?

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  • Christian Lehmann

    (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - ENPC - École des Ponts ParisTech - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - ENS Paris - École normale supérieure - Paris, PSE - Paris School of Economics)

Abstract

High levels of inequality are a persistent feature of many rural areas in the developing world. Rural inequality is correlated with major impediments of rural development, such as crime, elite-capture, and lack of collective action. Government transfer programs, such as conditional cash transfer, unemployment insurance, old-age pension or similar programs that target the lower tail of a village's cumulative welfare distribution function have become a very popular public policy to tackle poverty and inequality in rural areas. While the poverty impacts of those programs are well documented in the literature less attention has been given to the redistributive capacity of such policies at the village level. Among the main reasons for the neglect is a common belief that monetary transfers to the lower tail of the village welfare distribution (i.e. ‘the poor'), while excluding the upper tail (i.e. ‘the rich') from the program, must lead to a reduction in inequality. In this paper we show that the impact of such programs on reducing rural inequality may be lower than previously thought. This is because program-eligible lower and program-ineligible upper tail do not behave in isolation from each other. They are linked via interactions in credit & insurance, as well as factor & commodity markets. If, consequently, a government transfer triggers the lower tail to shift then the upper tail follows, leading to modest reductions in local inequality.

Suggested Citation

  • Christian Lehmann, 2010. "Why may government transfers to the poor have modest effects on reducing rural inequality?," PSE Working Papers halshs-00564924, HAL.
  • Handle: RePEc:hal:psewpa:halshs-00564924
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00564924
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    References listed on IDEAS

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    1. Jeff Dayton-Johnson & Pranab Bardhan, 2002. "Inequality And Conservation On The Local Commons: A Theoretical Exercise," Economic Journal, Royal Economic Society, vol. 112(481), pages 577-602, July.
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    Keywords

    evaluation of public policies; inequality; poverty; microsimulation; externalities;

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