Description:

Speaker: Johanna Rayl

Title: Redistribution with Limited Information: Fuel Subsidies and Cash Transfers in Indonesia

Abstract: We study optimal design of cash and in-kind redistribution in a setting with limited information: cash transfers and fuel subsidies in Indonesia. In 2005, the government shifted spending away from a costly and regressive consumer fossil fuel subsidy and towards a targeted cash transfer program, which was hindered by the government’s limited ability to identify low-income households. In our model, a planner with distributional preferences may prefer in-kind over cash mechanisms if the targeting benefits of self-selection over the in-kind good outweigh the inefficiencies associated with subsidization. An optimal in-kind (subsidy) transfer can improve welfare depending on the joint distribution of covariates used for targeting cash transfers with parameters governing consumption of the in-kind good. We take this model to the data in the Indonesian setting, estimating household preferences for fuel by exploiting large exogenous shocks to fuel prices, and solving for the optimal policy given a limited government information set.