Do Public Program Benefits Crowd Out Private Transfers in Developing Countries? A Critical Review of Recent Evidence

TL;DR

This paper critically reviews recent empirical evidence on whether public social protection programs in LMICs displace private transfers, analyzing behavioral responses and heterogeneous effects to inform policy for maximizing social welfare.

Contribution

It provides a comprehensive synthesis of recent studies on crowd-out effects of public benefits in LMICs, highlighting the importance of targeted policies to avoid welfare loss.

Findings

Public programs can displace private transfers, but effects vary by socioeconomic factors.

Careful targeting of social protection programs can mitigate crowd-out and enhance poverty reduction.

Heterogeneous effects suggest policy design should consider local socioeconomic contexts.

Abstract

Precipitated by rapid globalization, rising inequality, population growth, and longevity gains, social protection programs have been on the rise in low- and middle-income countries (LMICs) in the last three decades. However, the introduction of public benefits could displace informal mechanisms for risk-protection, which are especially prevalent in LMICs. If the displacement of private transfers is considerably large, the expansion of social protection programs could even lead to social welfare loss. In this paper, we critically survey the recent empirical literature on crowd-out effects in response to public policies, specifically in the context of LMICs. We review and synthesize patterns from the behavioral response to various types of social protection programs. Furthermore, we specifically examine for heterogeneous treatment effects by important socioeconomic characteristics. We conclude by drawing on lessons from our synthesis of studies. If poverty reduction objectives are considered, along with careful program targeting that accounts for potential crowd-out effects, there may well be a net social gain.