Efficient audit mechanisms to target the poor

Type Thesis

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Summary

Aid and welfare agencies typically target transfers to the poor and attempt to exclude the rich. But checking whether an individual is rich or poor is costly. This dissertation proposes mechanisms that use local information to save on audit costs. A cross reporting mechanism induces the poor to identify cheaters by rewarding them with a higher share of the total transfers if they do so. A joint liability mechanism permits the poor to form into groups, audits one member of each group at random and denies transfers to the entire group if the audit reveals a rich member. The mechanisms studied here have unique equilibrium outcomes, impose only arbitrarily small fines and are robust to collusion. They resemble the design of observed targeted programs, such as a scheme to detect welfare fraud in Britain and a rural credit organization in Bangladesh. Finally, informal insurance arrangements are shown to reduce the effectiveness of spending on audits to target transfers.