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

Guimarães, Luis and Lourenço, Diogo (2024): The Imperfections of Conditional Programs and the Case for Universal Basic Income.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Universal Basic Income; Welfare System; Take-up; Illegitimate Transfers; Administrative Costs; Labor Market Flows.
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J21 - Labor Force and Employment, Size, and Structure; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search

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