Universal Basic Income in Developing Countries: Pitfalls and Alternatives

Abstract

We study the macroeconomic and social effects of Universal Basic Income (UBI) programs in a developing economy, comparing them with policies that condition cash transfers on household characteristics (CCT). We construct a dynastic heterogeneous-agent model with human capital investment and choice of labor effort and calibrate it to Brazilian data. In the short run, UBI alleviates poverty and increases the welfare of the poor. Over time, however, income falls and poverty and inequality increase since investments in physical and human capital decrease along with labor supply. In most dimensions, CCT programs outperform UBI policies, largely due to school enrollment requirements.