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The Imperfections of Conditional Programs and the Case for Universal Basic Income

Author

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  • Guimarães, Luis
  • Lourenço, Diogo

Abstract

What is the impact of replacing conditional welfare programs with a Universal Basic Income (UBI) that costs the same? We answer this question using a general-equilibrium model with incomplete markets that accounts for three imperfections of conditional programs: incomplete take-up, illegitimate transfers, and administrative costs. We find that these imperfections, particularly incomplete take-up, substantially affect welfare. We also find that replacing the conditional programs with a UBI would increase capital stock, employment, and output, and lower inequality. Yet, the welfare effect of a UBI is not clear-cut. Aggregate welfare would fall in our benchmark, but a moderately larger UBI would be preferable to an equal expansion of conditional programs, especially for the least educated.

Suggested Citation

  • Guimarães, Luis & Lourenço, Diogo, 2024. "The Imperfections of Conditional Programs and the Case for Universal Basic Income," MPRA Paper 119964, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:119964
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    Keywords

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    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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