Excess of Transfer Progressivity in the Village
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Money Macro Seminar
PCPSE 101
United States
Abstract: Using primary data on food transfers for a complete village in rural Malawi, we find that the extent of transfer progressivity across households is large---with an income-to-transfer elasticity of 0.60. The solution to village-calibrated versions of endogenously incomplete market models arising from limited commitment (LC) and private information (PI)---through hidden income or effort---imply constrained-efficient levels of progressivity that are substantially lower than the actual levels of progressivity in the village. Further, the first best---full insurance---implies a level of transfer progressivity that is still lower than that of the village. To explore what drives the actual allocations, we introduce wedges in the LC and PI constraints and quantitatively single out the role of the ex-ante participation constraint. Interestingly, we find that these wedges tend to disappear if we decrease current village income to past productivity levels---i.e. a pre-fertilizers era. That is, the current transfers are similar to the efficient transfers that would emerge from past economic conditions. Interpreting these past contractual transfers as social norms, our results suggest that the currently inefficient excess of transfer progressivity in the village can be the result of norms that are sluggish to adapt to economic change.
Joint with Francesco Carli and Albert Rodriguez-Sala
