Decentralization and Efficiency of Subsidy Targeting: Evidence from Chiefs in Rural Malawi

• Development Workshop

Date and Location

Monday, May 9, 2016, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

A substantial share of the national budget in developing countries goes towards subsidies for the needy. The most common methods to select beneficiaries are a rule-based allocation relying on a proxy-means test (PMT) or a decentralized allocation in which a local agent identifies beneficiaries. A decentralized allocation may offer informational or accountability advantages, but may be prone to elite capture. We study this tradeoff in the context of two large-scale subsidy programs (for agricultural inputs and for food) decentralized to traditional leaders (“chiefs”). We find that chiefs do slightly worse in targeting needy households (as proxied by consumption) than a perfectly respected and regularly updated PMT would, though both mechanisms make errors. Results from a model-based test are consistent with chiefs taking into consideration productive efficiency when identifying beneficiaries for input subsidies. This suggests that some of the poverty-mistargeting observed among chiefs could be welfare improving, since within-village redistribution is common.