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Poverty Alleviation Programs: Monitoring vs. Workfare

Oliveira, Márcia and Côrte-Real, Paulo (2006): Poverty Alleviation Programs: Monitoring vs. Workfare.

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The role of Poverty Alleviation Programs (PAP) in �ghting poverty and ensuring the satisfaction of basic economic needs is well known. How- ever, informational asymmetries create the need for adequate instruments to prevent fraud. This paper provides a static model of adverse selection where the gov- ernment (principal) aims to minimize the costs of a PAP that ensures that all individuals have access to an exogenously de�ned minimum in- come level. Agents may di¤er in their income-generating ability and disutility of labor. Under the di¤erent informational environments, we study the ef- fectiveness of workfare (that involves unpaid and unproductive work in the public sector) as a screening device, based on the comparison with standard monitoring. We �nd that when disutility of labor is the only unobservable variable, a workfare policy is ine¢ cient because it �crowds out�private sector work and signi�cantly increases the costs of the program. Under this informa- tional context, monitoring may be the best instrument for preventing fraud. When income-generating ability is the only unobservable variable, choosing between workfare and monitoring depends not only on the cost function associated with the latter, but also on income distribution. The analysis of this case would suggest that a workfare policy might be inef- �cient in the context of undeveloped countries where income distribution exhibits strong inequalities, but appropriate in developed ones. These conclusions suggest that a mixed policy combining workfare and monitor- ing may be optimal when both income-generating ability and disutility of labor are unknown.

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