The Redistributive Effects of Transfers

Existing literature assessing the impacts of transfers on low income households assumes that transfer program participants benefit by the full amount of cash transfers received. We argue that because tax-back arrangements accompany such transfer programmes, and endogenous participantion decisions (regime choices) are involved, a money-metric measure of the utility generated by transfers will typically be substantially less than the cash value of transfers received. We use a conditional choice general equilibrium model of the UK, calibrated to literature based labor supply and labor demand elasticities, with a leisure-consumption choice for household and production involving heterogeneous labor inputs. In the model households face non-convex budgets set due to differences in tax rates and tax-back schemes in transfer programmes. Household demands for leisure and consumption goods are evaluated numerically using optimization techniques within a larger equilibrium structure including the production side of the economy since demand are non-analytic. Model results suggest that a money-metric measure of the utility equivalent of transfers received by the bottom deciles of UK households in the early 1990s was only 32 percent of cash transfers received due to the conditionality in these programmes.