Sticks and carrots for the alleviation of long-term poverty

Abstract

Work requirements can make it easier to screen the poor from the nonpoor. They can also affect future poverty by changing the poors’ incentive to invest in their income capacity. The novelty of our study is the focus on long-term poverty. We find that the argument for using work requirements as a screening device is both strengthened and weakened with long-term poverty, and that the possibility of using work requirements weakens the incentives to exert effort to escape poverty. We also show that the two incentive problems, to screen poverty and deter poverty, are interwoven; the fact that the poor can exert an effort to increase their probability of being non-poor in the future, makes it easier to separate the poor from the non-poor in the initial phase of the program. Finaly we show that if it is possible to commit to a long-term poverty alleviation program it is almost always optimal to impose some work requirements on those that receive transfers.