Sticks and Carrots for the Alleviation of Long Term Poverty
54 Pages Posted: 28 Feb 2002
Date Written: January 2002
Work requirements can make it easier to screen the poor from the non-poor. They can also affect future poverty by changing the poors' incentive to invest in their income capacity. The novelty of our study is the focus on long term poverty. We find that the argument for using work requirements as a screening device is both strengthened and weakened with long term poverty, and that the possibility of using work requirements weakens the incentives to exert effort to escape poverty. We also show that the two incentive problems, to screen poverty and deter poverty, are interwoven; the fact that the poor can exert an effort to increase their probability of being non-poor in the future makes it easier to separate the poor from the non-poor in the initial phase of the program. Finally we show that if it is possible to commit to a long term poverty alleviation program it is almost always optimal to impose some work requirements on those that receive transfers.
Keywords: Long-term Poverty, Ratchet Effect, Moral Hazard, Screening
JEL Classification: D82, I38
Suggested Citation: Suggested Citation