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Distortionary effects of conditions attached to cash transfers
Photo credit: Mariajose Silva Vargas
It’s well known that in the absence of market failures or externalities, giving people cash with no strings attached (unconditional cash transfers or UCTs) is better than giving them cash conditional on certain behaviors by the beneficiary. Inefficiencies (private or social) or political economy arguments are necessary to justify attaching conditions to cash transfers in order to get households to invest in more of something that the government deems desirable. From a welfare perspective, if the households were already operating with no failures (such as imperfect information, etc.) other than credit constraints, UCTs would be sufficient to solve the problem and CCTs would inefficiently distort behavior through the condition. A new paper by Bryan et al. (2021) provides a new example of such a distortion.