such as health or education may be offset by a crowding out of private expenditures or, in the best case, be complemented by private investments. In any case, developing a better understanding of the nature of this relation has crucial policy implications for the design of CCT programs. In the following section, we will illustrate this point more formally in building on Heckman and Cunha’s (2007) model on the technology of skill formation.

Our subsequent empirical analysis relies on a rich dataset covering the entire Brazilian territory and provides detailed information about the consumption choices of beneficiaries of the largest CCT of which we have knowledge. Our approach differs from most of the empirical literature on BFP which use PSM to identify its impact, in that we adopt a multidimensional fuzzy RDD approach to identification by using two forcing variables (income per capita and number of children), which we believe is better fit to dealing with unobservable characteristics of households. We confront our results with standard Engel curves which are informative of the change in expenditure choices with the expansion of income. This comparison allows us to analyze whether the effect of BFP on expenditure choices goes beyond a pure income effect.

# **3 Household expenditure decisions under CCT**

Conditionality in social policy, per se, is not new – conditionalities have long been an integral part of social programs in the past (e.g. in food programs).<sup>20</sup><sup>_,_21</sup> The conditionalities currently applied in CCTs differ from previous conditionalities in their focus on breaking intergenerational poverty transmission through human capital accumulation and in that the conditionalities are imposed with respect to the demand for non-tradable services (e.g. health care and education). There are three critical variables that we consider in this essay as basic inputs for human capital production: nutrition<sup>22</sup> , health and education.

To illustrate the potential mechanisms through which the program may affect beneficiaries’ expenditure decisions, we formalize the household’s maximization problem in an intertemporal

> 20An example is Fome Zero in Brazil, a previous program, commenced in 2003, in which beneficiaries received cash conditional on spending the transfer on food. Another example is the Supplemental Nutrition Assistance Program in the USA, well known as “food stamp program”.

> 21We will refer to the conditionalities which we are addressing here ‘Second Generation of Conditionalities’ (SGC) of CCT programs. Distinctive to FGCs, SGCs are based on an intergenerational behavior constraint. The cash is directly transferred to a woman in the household conditional on the participation in health and educational services that increase their children’s human capital. The ‘First Generation’ (FGC) imposed conditions regarding the consumption of tradable goods. It is likely inefficient to constrain households’ consumption behavior using the FGC approach. For example, if one transfers food instead of cash or if one imposes a conditionality on the amount of money used for buying food (or any other tradable good targeting child nutrition, for example) this might create conditions for an informal market in which beneficiaries will trade their rights for specific items in exchange for other desired goods or services. In section 8.3, we demonstrate how transfers under different forms may affect household consumption choices and welfare in a one period optimization problem.

> 22There is evidence of positive impacts of improving nutrition during childhood on education. See Alderman et al. [2001], Alderman et al. [2006], Glewwe and Miguel [2007] and Maluccio et al. [2009]

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