Benefit incidence with incentive effects, measurement errors and latent heterogeneity: A case study for China

Abstract

In what is probably the largest cash transfer program in the world today China's Dibao program aims to fill all poverty gaps. In theory, the program creates a poverty trap, with 100% benefit withdrawal rate (BWR). But is that what we see in practice? The paper proposes an econometric method of estimating the mean BWR allowing for incentive effects, measurement errors and correlated latent heterogeneity. Under the method's identifying assumptions, a feasible instrumental variables estimator corrects for incentive effects and measurement errors, and provides a bound for the true value when there is correlated incidence heterogeneity. The results suggest that past methods of assessing benefit incidence using either nominal official rates or raw tabulations from survey data are deceptive. The actual BWR appears to be much lower than the formal rate, and is also lower than the rate implied by optimal income tax models for poverty reduction. The paper discusses likely reasons based on qualitative observations from field work. The program's local implementation appears to matter far more than incentives implied by its formal rules.

A Market for Work Permits

“…26 Famous examples include the Speenhamland System of 1795, which aimed to guarantee a minimum income through a sliding scale of wage supplements (Himmelfarb, 1984). Another example is the Di Bao program in China, which similarly aims to top up all incomes until they reach stipulated minima (set by each city) (Ravallion and Chen, 2015). 27 An example is the National Rural Employment Guarantee Scheme in India.…”

Recognition of innovation and diffusion of welfare policy: Alleviating urban poverty in Chinese cities during fiscal recentralization

“…Second, the economic policy that creates wealth is usually built on market system innovation, whereas welfare policies, where financial resources are consumed for citizens, may not be explained using the same theories on economic performance, intergovernmental relations, and cadre promotion. Third, considerable studies on the policy evaluation on welfare programs in China have ignored largely the complicated diffusional processes in which local governments decide to adopt social policies (e.g., the recent evaluation of China's UMLSA system; Ravallion & Chen, ), which may result in statistical selection bias. Therefore, this article intends to reassess the dynamic diffusional process of welfare policies by focusing on the effect of intergovernmental relations in China.…”

Sharing the Benefits of China’s Growth by Providing Opportunities to All

“…In addition, empirical studies hint that the practices of some local officials reduce the participation tax rate. In a study of seven Chinese cities, Ravallion and Chen (2015) estimate the actual effective tax rate at 7%, implying low levels of benefit withdrawal as incomes rise. They contend that this is because local officials in those areas do not reduce the dibao transfer payments as stipulated by the central scheme design.…”