An Agency Model of Welfare and Disability Assistance

CREFE, Universite du Quebec a Montreal Working Paper No. 46

Posted: 15 Apr 1997

See all articles by Robin Boadway

Robin Boadway

Queen's University; CESifo (Center for Economic Studies and Ifo Institute); Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE)

Nicolas Marceau

Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE)

Motohiro Sato

Hitotsubashi University - Faculty of Economics

Date Written: February 1997

Abstract

Welfare programs including disability benefits have been considered as an efficient way of delivering transfers to the needy. This paper addresses the importance of administrative cost of welfare systems by focusing on an agency problem arising between the government and social workers, whose job is to use tagging to determine eligibility for welfare benefits. Tagging is imperfect in that it involves type I and II errors, and its accuracy depends on the effort of the social workers, which is private information. To induce positive effort, the government needs to monitor the social workers using a costly auditing procedure. Using the framework of optimal non-linear income taxation, we characterize second-best redistribution policies when the government can operate a welfare program alongside a negative income tax. The welfare program contains a disability benefit and a general welfare component. Welfare applicants that are tagged receive the disability benefit, while those who are untagged are accepted for general welfare benefits. It is emphasized that whether or not general welfare recipients, who may be the abled or disabled, should be allowed to work is substantially affected by the nature of the administration cost of welfare programs and by indivisibilities that may exist in labor supply. Our ultimate objective is to contribute to the debate concerning transferring income to the poor using welfare programs versus negative income tax systems. This involves trading off the costs of administering welfare relative to the benefits of tagging.

JEL Classification: H53, H31, D82, I12, I18, H2, I3

Suggested Citation

Boadway, Robin and Marceau, Nicolas and Sato, Motohiro, An Agency Model of Welfare and Disability Assistance (February 1997). CREFE, Universite du Quebec a Montreal Working Paper No. 46, Available at SSRN: https://ssrn.com/abstract=4822

Robin Boadway

Queen's University ( email )

99 University Avenue
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Canada
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HOME PAGE: http://qed.econ.queensu.ca/pub/faculty/boadway/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE)

Ste-Foy, Quebec G1K 7P4
Canada

Nicolas Marceau (Contact Author)

Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE) ( email )

Ste-Foy, Quebec G1K 7P4
Canada

Motohiro Sato

Hitotsubashi University - Faculty of Economics ( email )

Tokyo, 186-8601
Japan

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