Why do Cash Transfers to the Poor May Have Modest Effects on Reducing Rural Inequality?

High levels of inequality are a persistent feature of many rural areas in the developing world. Rural inequality is correlated with major impediments of rural development, such as crime, elite-capture, and lack of collective action. Cash transfer programs, such as conditional cash transfer, unemployment insurance, old-age pension or similar programs that target the lower tail of the rural welfare distribution have become a very popular public policy to tackle poverty and inequality in rural areas. While the poverty impacts of those programs are well documented in the literature less attention has been given to the redistributive capacity of such policies. Among the main reasons for the neglect is a common belief that cash transfers to the lower tail of the village welfare distribution (i.e. `the poor') while excluding the upper tail (i.e. `the rich') from the program must lead to a reduction in inequality. In this paper we show that the impact of such programs on reducing rural inequality may be lower than previously thought. This is because cash transfers at the lower tail of a village's welfare distribution trigger behavioral responses which positively affect welfare at the upper tail.

JEL Classification: E21, H43, I38, O12, O17

Keywords Inequality, Poverty, Program Evaluation, SUTVA, Quantile Treatment Effects