Optimal Management of Transfers: An Odd Paradox

40 Pages Posted: 29 Aug 2017

Date Written: August 2017

Abstract

In this paper we consider transfers towards needy people but, unlike Atkinson, we assume that there exists a serious preference misalignment between the transfer maker and the beneficiary. The former wants to reduce the resulting discrepancy through monitoring the use of the transfer and imposing sanctions if the discrepancy proves too large. This external discipline combines with the internal discipline of the beneficiary, that is his/her willingness and ability to align with the transfer maker's objective. Besides the fact that costs of monitoring and sanctioning are explicitly taken into account, an original feature of our model is that the two types of discipline are made comparable: they can be summed up to obtain an aggregate discipline. We show that, paradoxically, an (exogenous) improvement of internal discipline may be over-compensated by a fall of external discipline. As a result, total discipline actually decreases and the discrepancy between the actual and the intended uses of the transfer increases instead of decreasing. This paradoxical outcome is obtained despite better preference alignment as cost savings are optimally implemented. Another consequence is that the relationship between internal and total disciplines may be non-monotonous.

JEL Classification: D02, D86, F35, O12

Suggested Citation

Bourguignon, Francois and Platteau, Jean‐Philippe, Optimal Management of Transfers: An Odd Paradox (August 2017). CEPR Discussion Paper No. DP12234, Available at SSRN: https://ssrn.com/abstract=3028600

Francois Bourguignon (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Jean‐Philippe Platteau

University of Namur ( email )

8 rempart de la vierge
Namur, 5000
Belgium

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