Poverty Targeting with Imperfect Information

Abstract: A key challenge for targeted antipoverty programs in developing countries is that policymakers must rely on estimated rather than observed income, which leads to substantial targeting errors. I propose a statistical decision framework in which a benevolent planner, subject to a budget constraint and equipped only with noisy income estimates, allocates cash transfers to the poorest individuals. In this setting, the commonly used plug-in rule, which allocates transfers based on point estimates, is inadmissible and uniformly dominated by a shrinkage-based alternative. Building on this result, I propose an empirical Bayes (EB) targeting rule. I show that the regret of the empirical Bayes rule converges at the same rate as that of the posterior mean estimator, despite applying a nonsmooth transformation to it. Simulations show that the EB rule delivers large improvements over the plug-in approach in an idealized setting and modest but consistent gains in a more realistic application.