WPS3994-IE <mark>I</mark> MPACT <mark>E</mark> VALUATION <mark>S</mark> ERIES <mark>N</mark> O <mark>. 6</mark>

# **Investing Cash Transfers to Raise Long-Term Living Standards**

Paul Gertler

## Sebastian Martinez

## Marta Rubio-Codina

In this paper we test whether poor households use cash transfers to invest in income generating activities that they otherwise would not have been able to do. Using data from a controlled randomized experiment, we find that transfers from the OPORTUNIDADES program to households in rural Mexico resulted in increased investment in micro-enterprise and agricultural activities. For each peso transferred, beneficiary households used 88 cents to purchase consumption goods and services, and invested the rest. The investments improved the household’s ability to generate income with an estimated rate of return of 17.55%, suggesting that these households were both liquidity and credit constrained. By investing transfers to raise income, beneficiary households were able to increase their consumption by 34% after five and a half years in the program. These results suggest that cash transfers to the poor may raise long-term living standards, which are maintained after program benefits end.

JEL Codes: I38, D12, D13, O12 Keywords: conditional cash transfer programs, randomized experiment, long run living standards, agricultural investments, micro-enterprise activity, liquidity and credit constraints.

World Bank Policy Research Working Paper 3994, August 2006 _The Impact Evaluation Series has been established in recognition of the importance of impact evaluation studies for World Bank operations and for development in general. The series serves as a vehicle for the dissemination of findings of those studies. Papers in this series are part of the Bank’s Policy Research Working Paper Series. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ <u>Acknowledgements: We have benefited from comments by Alain de Janvry, Pierre Dubois, Edward Miguel,</u> Elizabeth Sadoulet, John Skinner, Doug Staiger, Chris Udry and seminar participants at UC Berkeley, The World Bank, University of Toulouse, Stanford University, Columbia University, Yale University, the Mexican National Institute of Public Health and the NEUDC meetings at Brown University. We thank the OPORTUNIDADES program for its support, and in particular Rogelio Gomez-Hermosillo, Concepcion Steta and Iliana Yaschine . For the qualitative field work we gratefully acknowledge support from UCMEXUS and assistance from Sarit Beith-Halachmi, Giovanna Limongi, Ryo Shiba, and Jennifer Sturdy.

<u>Affiliation and Contact Information: Paul Gertler, Haas School of Business, University of California,</u> Berkeley and World Bank; <u>gertler@haas.berkeley.edu. Sebastian Martinez, World Bank, smartinez@worldbank.org, Marta Rubio-Codina, University of Toulouse (GREMAQ, INRA), marta.rubio@univ-tlse1.fr.</u>