metadata: authors: 0: author: Haddad, Lawrence
1: author: Kanbur, Ravi
count: World
docna: 0: docna: Intrahousehold inequality and the theory of targeting
docty: Policy Research Working Paper
subtopic: Macro-Fiscal Policy,Taxation & Subsidies,Economic Adjustment and Lending,Health Care Services Industry,Administrative & Civil Service Reform,Public Sector Management and Reform,Public Sector Economics,Public Sector Administrative & Civil
            Service Reform,Public Finance Decentralization and
            Poverty Reduction,Inequality,Democratic Government,Public Sector Administrative and Civil
            Service Reform,De Facto Governments
teratopic: Environment,Poverty Reduction,Social Protections and Labor
abstracts: cdata!: The two literatures on targeting and on
            intrahousehold inequality have developed rapidly over the
            past 15 years, but largely independent of each other. The
            literature on targeting concerns itself with the design of
            tax and transfer programs for poverty alleviation in the
            presence of limited information on who the poor are. The
            literature on intrahousehold inequality arose out of a
            dissatisfaction with "unitary" models of the
            household, especially in explaining inequality in
            consumption and achievements of different household members,
            even after allowing for relevant differences among them. The
            authors begin to forge the link between the two literatures,
            so they can address issues policymakers face around the
            world. After a brief reprise of the key features of the two
            literatures, they indicate how the presence of
            intrahousehold inequality and allocation mechanisms could
            affect the standard analysis of targeting theory. They
            conclude with a list of policy questions for further research.
repnme: repnme: Intrahousehold inequality and the theory of targeting
display_title: Intrahousehold inequality and the
            theory of targeting
listing_relative_url: /research/1991/10/699840/intrahousehold-inequality-theory-targeting
topicv3: Human Resources m1326304 1211,Poverty m1326687 695,Human Resources for Public Sector m1327490 724,Taxation m1327615 1121,Health m1504661 3480
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Environment,Poverty Reduction,Social Protections and Labor
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 18
model_extractions: **Policy, Research, and External Affairs**

# **Development Economics**

**WPS** 789

'I'llis papker It product ol' die Research Advisory Staff', Oilice of **Ilhc** Vice Prcsidcit, Development lcnnormi%s - is **part** ot a largcr cl'lort in PRE to understand the design of poverty alleviation policies. Copies are availablM frce fIrom the XVorl'J Biank 1818 **If** Street NW WaW hington D)C 20433. Please coiltact **Janc SweenC\,** rk,om **S3-026,** extension 310(21 **(13** pages). October 1991.

Th,c **te.o 1 ltCatiufcs oll la!tlgt** inand **on** initrahousehold incqualit\ liavc developcd rapidly oVkc, the **pa> I** 13 * cars, but la Rcl\ independent of each other.

T'hc literature on waroetino concerns itself' ; ilt)h Il desi Ln of **t.1a** dld tranlslfcr puitgi slwl M pmo eny alleviation in the presence of'limitcd in tlormiation on l lho the poor are.

intrahiouseihold inequality **anid** allocation mechanisms could affcet the standard analysis of' targeting theory. Thex coniclude with a list of policy questions for further rcsearcih including the following:

* iOW are coiincut ional rules lor indicator targeting modif'ied by different housciold allocatioIn mnechanisms.

**'I'lTh** literaturc oii intrahouschold inequ al ity arosc out ot a dissailst clion wnitih "unilar'' **modf,ls** otheiC houschol(j. es.plecially in explainill_ ilkqUlid t in consumtipion and achievements of (difteellt household mriembcrs, even al;ter allou. **i r tor reie\ adi** illerences **a.imolln tleilm.**

* How far v" roing can onlC go in targetinlg by simpl) assumiing that int-ahouseihold inequality does **n0ot** exist, **when in** fact it does?'

* What sort of intrahouscihold inlonnation s,tould bc collected to best aid tareeting?

Iladdad and Kanhur hbein **io** tforge **ihe** link hetu.cen the tvo literattu-es, so thex canl address issues policxmakeurs face around iltle u.old, Alter a hrief reprise of **ilic** key featurcs of **thc** t\ko litclrture.u **tilc** indicale ho% tile pilesence ol'

* **f-lo%** do the "bargaining" versus the "common prefcrence" views of tfhe liousciold **irillu-** encc our evaluation of alternative transfer prograrms?

I11<1[iSl \\, 'i,} . I' 1 **l'l** S, t :. **;. ":.,..** 1:t' tl'i2u:1,wl>. c 1 kertk un,Lr '\ y **'! I** iI3. tld1k '. **jlii** . **Rcxr.tr 'e (in~t7** f\WflUi, **'c** p'llvi, tit no: **flCk c-.I!i\ c''n o1h j' ii H.,i~k poli**

**Pict .:.! 1,% tl:,** **_I'R_ L Di;senn;:m.,r-.** Cc **fitcr**
# INTRAHOUSEHOLD INEQUALITY AND THE THEORY OF TARGETING*

# CONTENTS

|1.|INTRODUCTION<br>...........|1.|
|---|---|---|
|2.|INTRAHOUSEHOLD<br>ALLOCATION<br>AND INEQUALITY<br>. . . . . . .|. . . .<br>2|
|3.|THE PRINCIPLES<br>OF TARGETING . . . . . . . . . . . . .|. . . . **4**|
|4.|INDICATOR<br>TARGETING<br>AND INTRAHOUSEHOLD<br>ALLOCATION . .|. . . .<br>**6**|
|5.|SELF-TARGETING<br>MECHANISMS<br>AND INTRAHOUSEHOLD<br>BARGAINiI|NG<br>.<br>. .<br>8|
|6.|FURTHER RESEARCH . . . . . . . . . . . . . . . . . . .|. . . . 10|

* Invited paper for presentation at the Sixth Annual Congress of the European Economic Association, Cambridge, England, September 1991.
# INTRAHOUSEHOLD INEQUALITY AND THE THEORY OF TARGETING

# **1.** INTRODUCTION

The two literatures on targeting and on intrahousehold inequality have developed rapidly over the past 15 years, but largely independently of each other. The literature on targeting goes back at least as far as Akerlof (1979), and has concerned itself with the design of tax and transfer programs for poverty alleviation in the presence of limited information on who the poor are. The origins of the literature on intrahousehold inequality are referred to in Sen (1984). This literature arose out of a dissatisfaction with "unitary" models of the household, especially in explaining observed inequality in consumption and achievements of different household members, even after making an allowance for relevant differences among them.

While the two academic literatures have indeed been mostly innocent of each other, the significance of intrahousehold inequality and allocation for targeting has not escaped the notice of policymakers. In developed countries, the debate on whether child benefit should be paid to the mother at a welfare office, or to the father's paycheck through a tax exemption, has essentially been about the perceived allocation, and reallocation, of intrahousehold resources. Similarly, the discussion in developing countries about knock on effects of supplementary feeding programs for children, and
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for pregnant and lactating women, is essentially one about whether or not extra calories at the feeding station means fewer calories received by the individual at home.

The object of this paper is to begin the task of forging a link between the two analytical literatures on targeting and on intrahousehold inequality, so that they are better able to address issues faced in this area by policymakers in developed and developing countries. After a brief reprise of the key features of the two literatures in Sections 2 and 3, Sections 4 and 5 will indicate how the presence of intrahousehold inequality and allocation mechanisms could affect the standard analysis of targeting theory, Section 6 concludes with a list of topics for further research.

# 2. INTRAHOUSEHOLD ALLOCATION AND INEQUALITY

Are similar individuals treated dissimilarly in the allocation of consumption within a household? The answer from the empirical literature is that this possibility has to be taken seriously. Sen (1984) summarizes a number of studies on outcome variables which argue that girls within households are discriminated relative to boys. Harriss (1986) presents at least some evidence of calorie intake inequality. Haddad and Kanbur (1990a) shew that standard measures of inequality in calorie adequacy would be understated by 30 to 40 percent if intrahousehold inequality was ignored.

But is the above sufficient evidence that similar individuals are being treated dissimilarly? If individuals differ in their
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produdltiviiies, Lieri exArd caiories may weili De callea tor as an income generation device for the household as a whole (Pitt, Rosenzweig, and Hassan 1990). Even a household that was egalitarian in terms of its welfare functicn might allocate calories unequally. While there are some tests of the degree of inequality aversion displayed by a household welfare function, as revealed by consumption allocation and other outcomes (Behrman and Deolalikar 1989), a major debate in the literature is on whether such a "common preference" model is valid. An alternative is a view of the outcomes as being determined by intrahousehold bargaining. The empirical implications of this for demand theory are laid out by McElroy (1990), who makes clear that the difference between the common preference and bargaining approaches can be traced to the fact that, in the latter, changes in the external environment can alter the "threat points" and lead to reallocations that are different from those predicted by the household wel-are maximizing model.

Haddad and Kanbur (1990b) have considered the predictions of the bargaining model on intrahousehold inequality as the household gets better ott. they find that the net effect depends on a subtle interaction between changes in the gains from cooperation and in the threat points. Under certain conditions, intrahousehold inequality can first increase and then decrease, thus tracing out a "Kuznets curve." Haddad and Kanbur (1990c) find empirical evidence for such a relationship for data from the Philippines. Thomas (1990) and Altonji, Hayashi, and Kotlikoff (1990) are among the authors who find
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evidence that is not supportive of the common preference model. As we shall see, this finding is of some significance for targeting of poverty alleviation programs.

3. THE PRINCIPLES OF TARGETING Besley and Kanbur (1988) have considered the principles of targeting that underlie the literatur **e** manating from Akerlof (1978). The theory of targeting concerns itself with the design of transfer mechanisms for alleviating poverty. Given a pre-intervention distribution of income and a poverty line, an ideal solution nmight be characterized as being one where sufficient income is transferred to the poor to bring them just up to the poverty line. There are, however, at least two problems with the ideal solution. First, since transfers fall one-to-one with income, it entails an effective marginal tax rate on the poor of 100 percent. This is bound to have incentive effects-Kanbur, Keen, and Tuomala (1991) give a quantitative feel for the consequences. Second, it requires that the policymaker has quite detailed information on individuals, making it possible to exclude those above the poverty line, and to ta,lor the magnitude of the transfer quite finely to those below the poverty line. Such detailed information, and the administrative ability to use it, is simply not present in most developing countries, and, in certain contexts, in developed countries as well.

In view of this second problem, Besley and Kanbur (1988) characterize two types of targeting mechanisms-indicator targeting
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apd self-targeting. Indicator targeting relies on making the transfer contingent not on income or consumption, but some easily observable characteristic, such as sex, age, landholding, region of residence, etc. Akerlof (1978) referred to this as "tagging." As he shows, this extra information is bound to be useful. Kanbur (1987) and Kanbur and Keen (1989) derive optimal rules for contingent transfers, while Ravallion (1989) quantifies the gain from using this information. Haddad and Kanbur (1991a) develop the theory of "upper-limit indicator targeting," where an upper cutoff of an observable variable, such as age, is used to determine eligibility in transfer programs (e.g., supplementary feeding).

Self-targeting mechanisms rely on an announced scheme that permits unlimited participation, but is designed in such a way that only members of the target group find it worthwhile to participate. Thus, costly administrative screening and verification of indicators, etc., is not necessary-the incentives to participate are themselves the screen. Such "self-screening" or "self-selection" has been analyzed in the recent theoretica **l** iterature on imperfect information (e.g., Hoff and Stiglitz 1990), but the mechanisms themselves were well known, for example, to those who designed the Indian famine codes in the 19th century (Dr6ze 1988).

The basic idea is to impose a cost of participation that varies directly with pre-intervention income. The best known illustration of such a scheme is the Employment Guarantee Scheme (EGS) in tne state of Maharashtra in India (Ravallion 1991). This scheme, and others, rely
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on ofi¢;10 ni un. -I m..tcj n 'LI , but at d Waye low enough to attract only those with low pre-intervention incomes. Ravallion (1989) presents a theoretical analysis of such schemes, while Ravallion (1991) surveys some of the empirical evidence, concluding that such schemes do, indeed, act as effective targeting devices. But Ravallion's analysis, and most of the other literature on selftargeting schemes, ignores the effect that they can have on intrahousehold allocation, as we shall see in Sectiot, 5.

# 4. INDICATOR TARGETING AND INTRAHOUSEHOLD ALLOCATION

The simple analysis of indicator targeting, as conducted, for example, in Kanbur (1987), is in terms of lump sum transfers to individuals with different values of an indicator variable (e.g., region or landholding). All individuals with the same indicator value are treated identically, since, _ex hypothesi,_ there is no other information to differentiate between them. Un this assumption, Kanbur (1987) derives leakage minimizing rules based on statistical information derived, for example, from sample surveys. Individual incentive effects are ignored in the simple analysis. Kanbur and Keen (1990) show how the rules are modified when labor supply is elastic, so that incentive effects matter and the intervention itself changes the distribution of pre-intervention income.

Consider now the assumptions underlying indicator targeting in light of the literature on intrahousehold allocation. Suppose the indicator variable is such that not all members of the household have
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the same indicator value, e.g., when a program screens by age or by gender. The assumption of lump sum transfers to individuals is then seen to be making an assumption about the nature of intrahouseiold allocation. Is it that the individual who receives the transfer gets to keep it? How might we rationalize this? Certainly not in terms of a "common preference" model of the household, one of whose implications is that all household resources are first aggregated into a common pool and then reallocated, so that the marginal recipient of the transfer will, in the final analysis, only benefit partially. Such an argument is valid even if individual-level incentive effects are taken into account. This is an incentive effect of a different sort, to do with reallocations among groupings of individuals who have different values of the indicator variable being used.

Suppose now that the indicator variable is such that, by definition, all members of a household must have the same value, e.g., region of residence or crop/tenure group. What does the assumption of equal lump sum transfer now mean? It means that every member of the household receives the same transfer. But how is this effected? The slightest reflection on design and implementation issues will reveal that this assumption cannot possibly be maintained in terms of administrators actually ensuring an equal transfer to each member of a household. And, in any case, there is the issue of intrahousehold reallocation after the equal transfers take place. If the transfer in practice is effected through the head of household, say, then the
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assumption of equal transfer to all members of the household implies a model of introhousehold allocation which may or _m-y_ not be justified. In any event, what is clear is that the analysis of indicator targeting cannot proceed without a well articulated view of how a household allocates resources to its members. As Haddad and Kanbur (1991a) show, whether or not intrahousehold reallocations take place-and their exact nature--can make a big difference to who ends up benefitting from a program that relies on indicators to target transfers.

# 5. SELF-TARGETING MECHANISMS AND INTRAHOUSEHOLD BARGAINING

Haddad and Kanbur (1990b) present a simple model of intrahousehold bargaining whose object is to relite the gains from cooopration, and the outside options, to agricultural production possibilities. In that model, there are two individuals, each with access to a production function that produces output as the result of two task inputs. There is comparative advantage in the tasks, so it pays to cooperate and specialize in tasks. But how are the gains from cooperation to be divided? Suppose that the fallback option for each individual is identified with the outcome of working alone. The individua. with absolute advantage thus has a better fallback option and, if we interpret this as a threat point of a Nash bargain, he will get the higher share of the cooperative output. There is, therefore, intrahousehold inequality.
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Haddad and Kanbur (1990b,c) trace out the implications of this model as productivity of the two individuals increases so that the household as a whole is better off. But what does this model imply for the effectiveness of self-targeting mechanisms, such as the Employment Guarantee Scheme? Haddad and Kanbur (1991b) present a simple analysis which is nevertheless illuminating.

Consider the case where total cooperative output is giveln by x and the allocation of each individual is x1 and x2. Let the threat points be S, and S., defined by output when the two individuals work on their own. Suppose that S, **S,,** so that, under the axioms of Nash bargaining, x1 > **x2.** Now, suppose that the government introduces a scheme that guarantees an income of W. How will this affect intrahousehold inequality, and, in particular, the well-being of the less well off individual? For W **•** S,, of course, there is no effect whatsoever. But when W > S2, W becomes the threat point of individual **fl *.J-..1 6LL*..**..1 OL Ji-le ... Ii L b1 rY jjj9** **_L. UIlUCi tlIIC UsuaI uutI u_** _Of_ Ns **_1e_ Vh4iIIiy,** Lnererore, if W < **x2,** then an increase in W will increase x2 and decrease x1, even though the guarantee is not taken ug. As W increases to S,, both threat **pu;iiLb tLeI.uUi** e **qu!' a-,u** tihere is perfect equaiity. ror w > 4x, bOth individuals will move to the guarantee scheme. What is remarkable is that, even before this point, the scheme has a long reach-it equalizes intrahousehold allocation by altering outside options.

Of course, the credibility of the guarantee is at the heart of the matter, and this brings the issue back to some of the policy debates on employment rationing of employment guarantee schemes
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(Ravallion 1990). With rationing, the guarantee is not credible, and will not have its full effect on intrahousehold allocation. The analysis of interactions between intrahousehold allocation and selftargeting schemes thus stands cut as a potentiallh fruitful topic for theoretical and empirical research. A start is made in this direction in Haddad and Kanbur (1991b).

# 6. FURTHER RESEARCH

We hope that the juxtapositi **o** f the two literatures n that is attempted here will serve to increase the interaction between them. Such cross-fertilization has already begun, but a host of interesting theoretical, empirical, and policy questions sugges **t** hemselves. Among these: How are conventional rules for indicator targeting modified with different intrahousehold allocation mechanisms? How far wrong can one go in targeting by simply assuming that intrahousehold inequality does not exist, when, in fact, it does? What sort of intrahousehold information should be collected to best aid targeting? How do the "bargaining" versus "common preference" views of the household influence our evaluation of alternative transfer programs? In particular, what is the quantitative significance of the "long reach" of guarantee and self-targeting mechanisms, through their effect on bargaining threat points, even when no household member actually participates in the scheme?