The Allocation of Benefits Underuncertainty: A Decision-Theoretic Framework

Posted: 21 Feb 2008

See all articles by Ramses H. Abul Naga

Ramses H. Abul Naga

University of Bath - Department of Economics

Date Written: May 1995

Abstract

We consider the problem of targeting benefits when the incomes of families are not accurately observable by the public authorities. By income uncertainty it is meant that the decision-maker cannot ascertain an applicant&apos's income, but that he can assign probabilities with respect to the level of his resources. A decision-theoretic framework is used in order to analyze the decision to grant a benefit of fixed size. The derived decision rule consists of balancing the expected social cost of denying assistance to a person in need (type-I error) against that of granting a benefit to a non-poor (type-II error). Thus, when the cost of type-I errors are on the rise, or those of type-II errors fall, it becomes more desirable socially to increase population coverage of the benefit programme. Empirical illustrations are provided using a sample from the PSID.

Suggested Citation

Abul Naga, Ramses H., The Allocation of Benefits Underuncertainty: A Decision-Theoretic Framework (May 1995). LSE STICERD Research Paper No. 10. Available at SSRN: https://ssrn.com/abstract=1094735

Ramses H. Abul Naga (Contact Author)

University of Bath - Department of Economics ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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