Distributional Effects of Targeted Interventions
39 Pages Posted: 11 Feb 2022
Date Written: November 23, 2021
Governments around the world engage in fiscal interventions targeting the poor. Using a rich dataset on income and consumption of Indian households, we estimate the distributional effects of such interventions in a heterogeneous agent model. The standard scheme of interventions that consistently targets lower-income cohorts, has muted distributional impacts. However, a fiscally-equivalent scheme that changes the expected income profile of the targeted households in the same initial cohort irrespective of their future incomes, generates substantially larger effects by changing their income mobility. Quantitatively, such an intervention in the order of 0.6 percent of the output, approximating the Indian scenario, increases consumption share of the targeted group by nearly 2.5 percent, five times as large as the effect of standard interventions. As the intervention becomes larger in magnitude and scope, as is empirically observed in other developing countries, this intensive margin effect becomes stronger along with the extensive margin.
Keywords: Consumption Inequality, Targeted Interventions, Incomplete Markets
JEL Classification: E21, D51, E26
Suggested Citation: Suggested Citation