Targeted interventions: consumption dynamics and distributional effects

Abstract

Income distribution-based targeted interventions are quite common in developing economies. However, often due to institutional frictions, identification of the recipients happens at a lower frequency than the frequency of movement across income groups, leading to mis-identification of true and false recipients. What are the general equilibrium effects of such interventions? To measure the effects, we develop a heterogeneous agent production economy where agents face uninsurable income risks and we calibrate it to a novel panel dataset on monthly household income and consumption in India. We study the effects of persistent (identity-based) shocks as opposed to the usual temporary (income-based) income shocks, the difference being that in persistent payments individuals are guaranteed a payment across periods, regardless of their income status in future. We find that temporary interventions have muted distributional effects, while identity-based stimulus of the same size give rise to more prominent effects. In particular, a persistent income shock to the poorest decile equivalent to 0.6% of GDP leads to a 0.543% increase in consumption.