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IMF Staff Papers Logo    Last updated: July 2002
Volume 49, Number 2
The Optimal Subsidy to Private Transfers
Under Moral Hazard

Ralph Chami and Connel Fullenkamp

Full Text of this Article (PDF 105K)

Abstract: Private income transfers are increasingly viewed as an alternative to government income transfers such as social insurance and foreign aid. This paper models the incentive effects of government-subsidized private transfers and finds that although there is a significant welfare benefit to subsidizing private transfers, there is also a significant welfare cost. It is shown analytically, as well as through simulations, that the optimal subsidy to private transfers falls when the market reaction is taken into consideration. [JEL D64, D82, H21]