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Curbing Leakage in Public Programs: Evidence from India's Direct Benefit Transfer Policy

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  • Prabhat Barnwal

Abstract

Targeted price subsidies create a gap between subsidized and unsubsidized prices. The resulting dual pricing can lead to arbitrage opportunities where intermediaries divert subsidized goods to unintended beneficiaries via the black market. I study India's Direct Benefit Transfer policy for cooking fuel subsidies, which altered the existing subsidy program by transferring subsidies directly to beneficiaries' bank accounts. The policy decreased subsidized fuel purchases, indicating a reduction in diversion to the black market. Changes in unsubsidized fuel sales and black market prices provide supporting evidence that leakage was reduced. These results suggest that addressing the underlying perverse incentives in welfare delivery can improve efficiency by curbing leakages.

Suggested Citation

  • Prabhat Barnwal, 2024. "Curbing Leakage in Public Programs: Evidence from India's Direct Benefit Transfer Policy," American Economic Review, American Economic Association, vol. 114(12), pages 3812-3846, December.
    • Handle: RePEc:aea:aecrev:v:114:y:2024:i:12:p:3812-46
    DOI: 10.1257/aer.20161864
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    More about this item

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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