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

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  • Guimarães, Luis
  • Lourenço, Diogo

Abstract

How costly are the imperfections of conditional welfare programs? Should we replace these programs, in whole or in part, with a Universal Basic Income (UBI)? We answer these questions using a general equilibrium model with incomplete markets, accounting for three overlooked imperfections of real-life conditional programs: incomplete take-up, illegitimate transfers, and administrative costs. We find that these imperfections, especially incomplete take-up, significantly reduce welfare. Also, diverting half of the current welfare expenditure to finance a UBI maximizes welfare by mitigating distortions and reaching those in the dead angle of conditional programs. Conditional programs and UBI are, thus, complementary policy instruments.

Suggested Citation

  • Guimarães, Luis & Lourenço, Diogo, 2024. "The Imperfections of Conditional Programs and the Case for Universal Basic Income," MPRA Paper 128340, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:128340
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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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