DP15641 A political economy of loose means-testing in targeted social programs

Author(s): Helmuth Cremer, Justina Klimaviciute, Pierre Pestieau
Publication Date: January 2021
Keyword(s): Political Support, Redistribution paradox, Targeted transfers
JEL(s): D72, H23, H50
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15641

This paper studies the political sustainability of programs that are targeted towards the poor. Given that the poor to whom these programs cater do not constitute a majority, we show that for their own good it pays to let the middle class benefit from them in a random way. This approach mimics the actual institutional arrangements whereby middle-class individuals feel that they can successfully apply to the programs. We consider a two stage decision process: first a Rawlsian government chooses the probability at which the middle class is allowed to benefit from a given program; then, majority voting determines the level of benefit and the rate of contribution. At the first, constitutional stage, the government cannot commit to a specific level of taxes and benefit but anticipates that these are set by majority voting in the second stage.