Indirect Effects of an Aid Program: How do Cash Transfers Affect Ineligibles' Consumption

Abstract

We exploit the unique experimental design of a social program to understand how cash transfers to eligible households indirectly affect the consumption of ineligible households living in the same villages. This indirect effect on consumption is positive, and it operates through insurance and credit markets: ineligible households benefit from their neighbors’higher income by receiving more transfers, by borrowing more, and by reducing their precautionary savings. This exercise shows 1) how social programs may benefit the local economy at large, not only the treated; 2) how this beneficial effect is spread in the locality through informal credit and insurance arrangements; 3) how looking only at the effect on the treated results in an underestimation of the program impact. One should analyze the effects of this type of program on the entire local economy, rather than on the treated only, and use a village-level randomization, rather than selecting treatment and control subjects from the same community.