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

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.

• 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

References

Achdou, Yves, Jiequn Han, Jean-Michel Lasry, Pierre-Louis Lions, and Benjamin Moll. 2021. “Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach.” The Review of Economic Studies, 89(1): 45–86.

Aiyagari, S. Rao. 1994. “Uninsured Idiosyncratic Risk and Aggregate Saving.” The Quarterly Journal of Economics, 109(3): 659–684.

Akee, Randall K. Q., William E. Copeland, Gordon Keeler, Adrian Angold, and E. Jane Costello. 2010. “Parents’ Incomes and Children’s Outcomes: A Quasi-experiment Using Transfer Payments from Casino Profits.” American Economic Journal: Applied Economics, 2(1): 86–115.

Akee, Randall, William Copeland, E. Jane Costello, and Emilia Simeonova. 2018. “How Does Household Income Affect Child Personality Traits and Behaviors?” American Economic Review, 108(3): 775–827.

Benabou, Roland. 2002. “Tax and education policy in a heterogeneous-agent economy: What levels of redistribution maximize growth and efficiency?” Econometrica, 70(2): 481–517.

Berman, Matthew. 2018. “Resource rents, universal basic income, and poverty among Alaska’s Indigenous peoples.” World Development, 106: 161–172.

Bertrand, Marianne, Sendhil Mullainathan, and Eldar Shafir. 2004. “A Behavioral-Economics View of Poverty.” The American Economic Review, 94(2): 419–423.

Bewley, Truman. 1986. “Stationary monetary equilibrium with a continuum of independently fluctuating consumers.” Contributions to mathematical economics in honor of Gérard Debreu, 79.

Birinci, Serdar, and Kurt See. 2023. “Labor Market Responses to Unemployment Insurance: The Role of Heterogeneity.” American Economic Journal: Macroeconomics, 15(3): 388–430.

Boar, Corina, and Virgiliu Midrigan. 2022. “Efficient redistribution.” Journal of Monetary Economics, 131: 78–91.

Boerma, Job, and Loukas Karabarbounis. 2021. “Inferring Inequality With Home Production.” Econometrica, 89(5): 2517–2556.

Cairó, Isabel, Shigeru Fujita, and Camilo Morales-Jiménez. 2022. “The cyclicality of labor force participation flows: The role of labor supply elasticities and wage rigidity.” Review of Economic Dynamics, 43: 197–216.

Calsamiglia, Caterina, and Sabine Flamand. 2019. “A Review on Basic Income: A Radical Proposal for a Free Society and a Sane Economy by Philippe Van Parijs and Yannick Vanderborght.” Journal of Economic Literature, 57(3): 644–58.

Conesa, Juan Carlos, Bo Li, and Qian Li. 2023. “A quantitative evaluation of universal basic income.”Journal of Public Economics, 223: 104881.

Currie, Janet. 2006. “The take-up of social benefits.” In Public Policy and the Income Distribution. 80–148. New York, NY:Russell Sage Foundation.

Daruich, Diego, and Raquel Fernández. 2024. “Universal Basic Income: A Dynamic Assessment.” American Economic Review, 114(1): 38–88.

Dyrda, Sebastian, and Marcelo Pedroni. 2023. “Optimal Fiscal Policy in a Model with Uninsurable Idiosyncratic Income Risk.” The Review of Economic Studies, 90(2): 744–780.

Elsby, Michael W. L, and Matthew D Shapiro. 2012. “Why Does Trend Growth Affect Equilibrium Employment? A New Explanation of an Old Puzzle.” American Economic Review, 102(4): 1378–1413.

Fabre, A, S Pallage, and C Zimmermann. 2014. “Universal Basic Income versus Unemployment Insurance, Federal Reserve Bank of St.” Louis Working Paper 2014–47A.

Falk, Armin, Anke Becker, Thomas Dohmen, Benjamin Enke, David Huffman, and Uwe Sunde. 2018. “Global Evidence on Economic Preferences*.” The Quarterly Journal of Economics, 133(4): 1645–1692.

Ferreira, Pedro Cavalcanti, Marcel Cortes Peruffo, and André Cordeiro Valério. 2021. “Universal Basic Income in Developing Countries: Pitfalls and Alternatives.” EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil) FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 821.

Ferriere, Axelle, Philipp Grübener, Gaston Navarro, and Oliko Vardishvili. 2023. “On the Optimal Design of Transfers and Income Tax Progressivity.” Journal of Political Economy Macroeconomics, 1(2): 276–333.

Finkelstein, Amy, and Matthew J Notowidigdo. 2019. “Take-Up and Targeting: Experimental Evidence from SNAP*.” The Quarterly Journal of Economics, 134(3): 1505–1556.

Forsythe, Eliza, and Hesong Yang. 2021. “Understanding Disparities in Unemployment Insurance Recipiency.” US Department of Labor.

Ganong, Peter, and Pascal Noel. 2019. “Consumer Spending during Unemployment: Positive and Normative Implications.” American Economic Review, 109(7): 2383–2424.

Guner, Nezih, Remzi Kaygusuz, and Gustavo Ventura. 2014. “Income taxation of US households: Facts and parametric estimates.” Review of Economic Dynamics, 17(4): 559–581.

Guner, Nezih, Remzi Kaygusuz, and Gustavo Ventura. 2023. “Rethinking the Welfare State.” Econometrica, 91(6): 2261–2294.

Haushofer, Johannes, and Jeremy Shapiro. 2016. “The Short-term Impact of Unconditional Cash Transfers to the Poor: Experimental Evidence from Kenya*.” The Quarterly Journal of Economics, 131(4): 1973–2042.

Heathcote, Jonathan, Kjetil Storesletten, and Giovanni L. Violante. 2017. “Optimal Tax Progressivity: An Analytical Framework.” The Quarterly Journal of Economics, 132(4): 1693–1754.

Hoynes, Hilary, and Jesse Rothstein. 2019. “Universal Basic Income in the United States and Advanced Countries.” Annual Review of Economics, 11(1): 929–958.

Hubmer, Joachim, Per Krusell, and Anthony A. Smith. 2021. “Sources of US Wealth Inequality: Past, Present, and Future.” NBER Macroeconomics Annual, 35: 391–455.

Huggett, Mark. 1993. “The risk-free rate in heterogeneous-agent incomplete-insurance economies.” Journal of Economic Dynamics and Control, 17(5): 953–969.

Jaimovich, Nir, Itay Saporta-Eksten, Ofer Setty, and Yaniv Yedid-Levi. 2022. “Universal basic income: Inspecting the mechanisms.”

Jones, Damon, and Ioana Marinescu. 2022. “The Labor Market Impacts of Universal and Permanent Cash Transfers: Evidence from the Alaska Permanent Fund.” American Economic Journal: Economic Policy, 14(2): 315–40.

Kalai, Ehud. 1977. “Proportional Solutions to Bargaining Situations: Interpersonal Utility Comparisons.” Econometrica, 45(7): 1623–1630.

Kehoe, Patrick J., Virgiliu Midrigan, and Elena Pastorino. 2019. “Debt Constraints and Employment.” Journal of Political Economy, 127(4): 1926–1991.

Kekre, Rohan. 2023. “Unemployment insurance in macroeconomic stabilization.” Review of Economic Studies, 90(5): 2439–2480.

Kleven, Henrik Jacobsen, and Wojciech Kopczuk. 2011. “Transfer Program Complexity and the TakeUp of Social Benefits.” American Economic Journal: Economic Policy, 3(1): 54–90.

Ko, Wonsik, and Robert A Moffitt. 2022. “Take-up of Social Benefits.” National Bureau of Economic Research Working Paper 30148.

Kozminski, Kate, and Jungho Baek. 2017. “Can an oil-rich economy reduce its income inequality? Empirical evidence from Alaska’s Permanent Fund Dividend.” Energy Economics, 65: 98–104.

Krueger, D., K. Mitman, and F. Perri. 2016. “Chapter 11 - Macroeconomics and Household Heterogeneity.” In . Vol. 2 of Handbook of Macroeconomics, , ed. John B. Taylor and Harald Uhlig, 843–921. Elsevier.

Krusell, Per, and Jr. Smith, Anthony A. 1998. “Income and Wealth Heterogeneity in the Macroeconomy.” Journal of Political Economy, 106(5): 867–896.

Krusell, Per, Toshihiko Mukoyama, and Ay¸segül ¸Sahin. 2010. “Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations.” The Review of Economic Studies, 77(4): 1477–1507.

Krusell, Per, Toshihiko Mukoyama, Richard Rogerson, and Ay¸segül ¸Sahin. 2017. “Gross Worker Flows over the Business Cycle.” American Economic Review, 107(11): 3447–76.

Krusell, Per, Toshihiko Mukoyama, Richard Rogerson, and Ay¸segül ¸Sahin. 2020. “Gross worker flows and fluctuations in the aggregate labor market.” Review of Economic Dynamics, 37: S205– S226. The twenty-fifth anniversary of “Frontiers of Business Cycle Research".

Lachowska, Marta, Isaac Sorkin, and Stephen A Woodbury. 2022. “Firms and Unemployment Insurance Take-up.” National Bureau of Economic Research Working Paper 30266.

Ljungqvist, Lars, and Thomas J. Sargent. 1998. “The European Unemployment Dilemma.” Journal of Political Economy, 106(3): 514–550.

Luduvice, André. 2021. “The Macroeconomic Effects of Universal Basic Income Programs.”

Mani, Anandi, Sendhil Mullainathan, Eldar Shafir, and Jiaying Zhao. 2013. “Poverty Impedes Cognitive Function.” Science, 341(6149): 976–980.

McKay, Alisdair, and Ricardo Reis. 2016. “The Role of Automatic Stabilizers in the U.S. Business Cycle.” Econometrica, 84(1): 141–194.

Moffitt, Robert. 1983. “An economic model of welfare stigma.” The American Economic Review, 73(5): 1023–1035.

Mukbaniani, Nana. 2021. “The impact of a universal basic income system on aggregate capital, labor, welfare, and inequality.” PhD diss. Ph. D. thesis, City University of New York. URL https://academicworks. cuny . . . .

Ortego-Marti, Victor. 2016. “Unemployment history and frictional wage dispersion.” Journal of Monetary Economics, 78: 5–22.

Ortego-Marti, Victor. 2017. “Differences in skill loss during unemployment across industries and occupations.” Economics Letters, 161: 31–33.

Petrongolo, Barbara, and Christopher A. Pissarides. 2001. “Looking into the Black Box: A Survey of the Matching Function.” Journal of Economic Literature, 39(2): 390–431.

Plueger, Dean. 2009. “Earned Income Tax Credit Participation Rate for Tax Year 2005.” IRS Research Bulletin.

Ponza, Michael, James C Ohls, Lorenzo Moreno, Amy Zambrowski, Rhoda Cohen, et al. 1999. “Customer service in the food stamp program.” Mathematica Policy Research.

Rauh, Christopher, and Marcelo Rodrigues Santos. 2022. “How do transfers and universal basic income impact the labor market and inequality?”

Salehi-Isfahani, Djavad, and Mohammad H. Mostafavi-Dehzooei. 2018. “Cash transfers and labor supply: Evidence from a large-scale program in Iran.” Journal of Development Economics, 135: 349– 367.

Shimer, Robert. 2005. “The Cyclical Behavior of Equilibrium Unemployment and Vacancies.” American Economic Review, 95(1): 24–49.

Shimer, Robert. 2012. “Reassessing the Ins and Outs of Unemployment.” Review of Economic Dynamics, 15(2): 127–148.

Taxpayer Advocate. 2019. “Earned Income Tax Credit: Making the EITC Work for Taxpayers and the Government.” In Special Report to Congress Fiscal Year 2020. Vol. III.

Tempelman, Caren, and Aenneli Houkes-Hommes. 2016. “What Stops Dutch Households from Taking Up Much Needed Benefits?” Review of Income and Wealth, 62(4): 685–705.

US Department of Agriculture. 2022. “SNAP Data Tables: Participation and Costs, 1969-2021.”

US Department of Labor. n.d.. “Unemployment Insurance Payment Accuracy Datasets.”

US Federal Reserve Board. 2020. “Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances.” Federal Reserve Bulletin, 106: 1–42.

US Social Security Administration. 2022. “Annual Report of the Supplemental Security Income Program.”

Van Parijs, P., and Yannick Vanderborght. 2017. Basic Income: A Radical Proposal for a Free Society and a Sane Economy. Harvard University Press.

Verho, Jouko, Kari Hämäläinen, and Ohto Kanninen. 2022. “Removing Welfare Traps: Employment Responses in the Finnish Basic Income Experiment.” American Economic Journal: Economic Policy, 14(1): 501–22.

Watson, Brett, Mouhcine Guettabi, and Matthew Reimer. 2020. “Universal Cash and Crime.” The Review of Economics and Statistics, 102(4): 678–689.

Whittaker, Julie, Katelin Isaacs, and Abigail Overbay. 2022. “Funding the State Administration of Unemployment Compensation (UC) Benefits.” Congressional Research Service IF10838 versions 2-8.