Bribes, Bureaucracy and the Case for a Universal Basic Income

When designing policies to support the poor in India, does it make more sense to use targeted transfers or a universal basic income? This important public policy question was examined years ago by economists Rema Hanna and Benjamin Olken. Their conclusion was clear: even imperfect targeting of government transfers works better than universality in developing countries because concentrating resources on the poorest households generates larger welfare gains per rupee spent. A UBI, by spreading a fixed budget across everyone, necessarily gives smaller amounts to each recipient, including the better-off.

Thought-provoking new research by Nicholas Lawson and Dean Spears revisits this question and asks whether a UBI, which gives equal cash transfers to everyone, may actually be preferable in India once corruption and rent-seeking by local government agents are taken into account. Their central argument is that while conventional economic wisdom favours targeted transfers in developing countries, this conclusion changes considerably once the corrupting influence of targeting is modelled explicitly. 

Missing Link
Lawson and Spears identify a critical omission in the earlier Hanna-Olken analysis. In countries with significant corruption such as India, targeting does not merely fail because of imperfect information. Instead, it creates opportunities for local government agents to extract bribes. When households must be identified as “poor” to receive benefits, that identification process itself becomes a site of rent extraction.

The evidence supporting this concern is striking. Survey data from earlier research found that 75% of respondents in Karnataka reported paying a bribe to obtain a Below Poverty Line card, which determines eligibility for several welfare schemes.

Lawson and Spears build a model of households across the income distribution and calibrate it using two datasets: the India Human Development Survey II from 2011-12, which covered more than 40,000 households nationally, and Karnataka survey data from the earlier study.

In the first version of the model, without rent-seeking, targeting failures arise solely from imperfect information. When calibrated to BPL card receipt data, this model performs poorly because it cannot explain why the poorest households receive transfers at unexpectedly low rates. The data show far less receipt at the bottom of the income distribution than a purely information-based explanation would predict. Even so, the model’s optimal policy recommendation resembles the earlier Hanna-Olken conclusion, favouring targeted transfers covering roughly 63% of the population rather than a universal programme.

Policy Reversal
In the second version of the model, the researchers introduce rent-seeking. Local officials can accept bribes from households, increasing the probability that a household receives a transfer. Wealthier households pay larger absolute bribes, while poorer households pay bribes that consume a much larger share of their incomes, as high as 8.3% for the poorest households compared with 0.3% for the richest.

Once this behaviour is incorporated, the model fits the data far better, especially at the lower end of the income distribution. More importantly, the optimal policy conclusion reverses completely. A UBI now dominates all targeted alternatives.

First, universality eliminates opportunities for rent-seeking altogether. If everyone receives the transfer, there is no bureaucratic gatekeeper who can demand a payment in exchange for access. Second, the bribes themselves redistribute income in precisely the wrong direction, transferring resources from poor households to relatively better-off government agents.

The welfare gains from switching to a UBI in the rent-seeking model are substantial: 4.5% increase in consumption for all households, even though the programme distributes transfers worth only 2.5% of average income. The benefits are also broadly shared across household types because reduced bribe payments improve expected welfare throughout the income distribution, with the largest gains accruing to the poorest households.

Lawson and Spears show that their conclusions hold across a range of alternative assumptions involving risk aversion, redistribution budgets, administrative costs, different forms of corruption and income measurement errors. In every version of the model that includes rent-seeking, a UBI emerges as the optimal policy. Without rent-seeking, targeted transfers consistently perform better.

The research makes a compelling case that the standard trade-off between targeting and universality looks very different once corruption is treated as an endogenous feature of welfare systems rather than as an external inconvenience. For India, and perhaps for other developing countries with weak governance structures, a UBI may prove preferable not despite giving money to the non-poor, but precisely because doing so removes the bureaucratic chokepoints through which welfare programmes lose resources to corruption.

Views are personal.