respectively. In order to target the bottom 25 percent, it is recommended to set the cutoff score at the 30<sup>th</sup> percentile (which would make 23.7 percent of households eligible). The corresponding undercoverage rate for the three models is between 39 and 41 percent, and the leakage rate is about 36 percent. Using Model 1 with a 30 percent cutoff, the leakage rate would be 36 percent with 23.7 percent of the population eligible for Samurdhi. More than 75 percent of the bottom decile would be eligible for Samurdhi (compared with around 40 percent currently; see Table 2), and less than 1 percent of households in the top quintile would be selected (versus 3.8 percent at present).

Table 4. Eligibility rates for deciles of the actual consumption under different PMT cutoff scores and PMT models

|||Model 1<br>|||Model 2<br>|||Model 3<br>||
|---|---|---|---|---|---|---|---|---|---|
|Decile|Score: 887<br>(25th<br>percentile)|Score: 895<br>(30th<br>percentile)|Score: 909<br>(40th<br>percentile)|Score: 887<br>(25th<br>percentile)|Score: 895<br>(30th<br>percentile)|Score: 909<br>(40th<br>percentile)|Score: 887<br>(25th<br>percentile)|Score: 895<br>(30th<br>percentile)|Score: 909<br>(40th<br>percentile)|
|1|64.3|75.8|90.0|62.7|75.2|89.3|62.5|74.5|89.2|
|2|42.8|55.1|76.0|41.5|54.8|75.1|42.0|53.4|74.8|
|3|27.0|38.3|59.9|26.7|36.9|58.6|27.2|36.7|58.2|
|4|17.2|27.4|48.8|16.9|26.9|47.7|17.5|26.7|48.4|
|5|9.8|17.0|34.5|9.9|16.9|33.6|9.7|16.4|34.0|
|6|7.6|12.3|25.8|7.7|12.5|25.2|7.4|12.4|25.6|
|7|3.5|5.8|15.8|3.2|5.9|15.6|3.7|6.7|16.4|
|8|2.0|3.6|9.2|1.7|3.5|9.7|1.9|3.8|10.3|
|9|0.8|1.4|4.2|0.7|1.5|4.8|0.8|1.4|5.2|
|10|0.3|0.5|1.8|0.2|0.5|1.6|0.2|0.4|1.8|
|Total|**17.5**|**23.7**|**36.6**|**17.1**|**23.5**|**36.1**|**17.3**|**23.2**|**36.4**|

# _Welfare impact of improving targeting efficiency_

We have so far examined the PMT formula from the perspective of targeting efficiency. A related, and equally important question is: what kind of welfare improvements we can expect with the application of these formulas in transferring benefits to eligible beneficiaries? We present one case which could serve as a useful example, although there are multiple ways in which we could answer this question. Narayan and Yoshida (2005) discuss more scenarios and describe the basic methodology in detail.

Table 5 presents the welfare outcomes, measured by the Foster‐Greer‐Thorbecke (FGT) index under three scenarios. The first case is the baseline data collected in HIES 2016, in which household consumption includes Samurdhi benefits. The poverty headcounts at the national poverty line of Rs. 4,166 per month and the $3.20 per day for lower middle‐income countries in this baseline scenario are 4.08% and 9.50%, respectively. In the second scenario, Samurdhi benefits are subtracted from the consumption expenditures of all households. The third scenario modifies the second scenario by re‐introducing the Samurdhi benefits (Rs. 1,732 per capita) for households in the bottom 20% of the consumption distribution, identified by the PMT formula and a 25<sup>th</sup> percentile cutoff score.

The amount Rs. 1,732 was obtained by dividing the total Samurdhi benefits received by all households, according to HIES 2016, by the population in the bottom 20% of the welfare distribution. This new allocation 12