Pascaline Dupas on Decentralization and Efficient Targeting of Subsidies

Pascaline Dupas, a development economist at Stanford University, gave a talk in our department this afternoon on how decentralization affects the targeting of subsidies in Malawi.

The allocation of public subsidies to targeted beneficiaries is an important task of governments in developing countries. Three conditions need to be met to maximize the effectiveness of these subsidies:

1. They should be assigned to people with the highest returns.

2. There should be limited leakage on the way to assigned beneficiaries.

3. Beneficiaries should put subsidies in appropriate (intended) use.

The second and the third conditions have been explored extensively in the development economics literature. For example, economists have examined the effectiveness of conditional cash transfer (CCT) programs on school enrollment of children in poor families. By making school enrollment a precondition for cash transfers, the government hopes to nudge parents to send their children to school, which they probably wouldn’t do if the transfers were unconditional.

The purpose of this paper is to investigate the first condition. More specifically, they look at the effectiveness of centralized (proxy means tested, or PMT-based) vs. decentralized (through chiefs) allocation of subsidies in Malawi. Dupas and her coauthors ask the following questions:

To what extent does the poor performance of local authorities in the aggregate come from inefficient allocation of resources or subsidies? How well do chiefs target? Could a centralized (PMT-based) system do better?

In Malawi, like in many other African countries, chiefs play an important role in allocating resources within local communities. There are advantages and disadvantages of letting the chiefs assign the subsidies instead of the government. PMT-based systems assign subsidies based on asset owned by individuals/families, but asset is a poor predictor for consumption levels of the poor, and the latter is a much more reasonable measure of poverty. Chiefs, on the other hand, are likely to have more local information, especially regarding the relative characteristics of the households within the community. Therefore, they might do a better job assigning the subsidies to targeted beneficiaries. However, chiefs might also favor their kins and dampen the intended equalizing effects of the subsidies.

The authors assess the efficiency of subsidy allocation along two margins: poverty targeting and productivity efficiency. The former is giving subsidies to people who are eligible based on their consumption of perishable food, while the latter assigns subsidies to people where the returns are the highest. If chiefs know that there will be income pooling between community members after subsidies are put to use, they will have more incentive to allocate subsidies to the most productive households in order to maximize efficiency. Such an outcome will also be more likely the more heterogeneity there exists in productivity.

Dupas showed us the error rates of three systems of subsidy allocation: a hypothetical PMT-based system, an allocation through chiefs, and a random allocation. There are two types of errors: type I error where an eligible individual is not given a subsidy, and type II error where an ineligible individual is given one. Surprisingly, chiefs seem to do as well as a PMT-based system at identifying the targeted beneficiaries.

How to incorporate productivity and equality considerations into the decision process of the chiefs? The authors proposed a general framework where the chief maximizes a weighted sum of households’ benefits from the subsidy (in terms of expected additional profit) within the community. They divide households into different classes based on their relationship with the chief, poverty status, and returns to the subsidy. The relative weights of the chief towards different classes can be recovered through comparing the allocation patterns of food versus input subsidy, with the assumption that the former doesn’t involve productivity considerations while the latter does.

Although the question they are investigating is interesting and important, I wish the speaker were clearer about what alternative allocation systems could generate similar effects as allocating through the chiefs. In particular, if the only advantage of the chief relative to a centralized agency is that he (or she, in the rare case) has updated local information, would it be possible to create a self-monitoring system within the community such that people divide the subsidy optimally among themselves? Another related concern is that the chief is likely to base their judgment on self-reported characteristics of the household when allocating resources. If they don’t observe the true productivity of households in the community, how might that affect the findings about their productivity efficiency consideration? I look forward to reading their paper when it comes out.

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