Cash Transfers for Poverty Alleviation Under Double Asymmetric Information Regarding Income and Productivity

Abstract

When a government makes cash transfers as a part of a poverty alleviation program, it often faces a screening problem in identifying those individuals who most deserve to be supported financially because individual productivity levels cannot be monitored. Self‐selection mechanisms such as in‐kind transfers have been proven to be able to overcome this screening problem when individual income levels can be observed by the government. However, especially in developing countries, it is also often difficult for the government to observe individual income. In this article, we thus propose a mechanism that enables cash transfers to support deserving individuals, even though individual income levels cannot be monitored. Moreover, the proposed system allows the government to obtain the necessary financial resources by collecting taxation from productive individuals.