Self-Selection under Uncertainty: The Role of Capacity Constraints

• In Event: Administration of the Safety Net

Abstract

Many social transfer programs around the world face capacity constraints that prevent all means-eligible individuals from accessing benefits. These constraints include budgetary limitations, logistical inefficiencies, or institutional barriers, and can present as de jure—where the government assigns a fixed number of quotas to the program—or de facto, in programs where all eligible individuals are legally entitled to receive benefits, yet in practice, there are often insufficient resources to accommodate the entire target population. This issue extends to developed countries, where capacity limitations have led to waitlists in programs such as subsidized childcare and housing vouchers.

Such constraints are often viewed as suboptimal because they prevent intended transfers from reaching all eligible individuals. However, they may, in fact, serve as a targeting mechanism when individuals' true income or need is not directly observable by the government. Intuitively, limitations reduce the probability of program entry conditional on choosing a means-eligible level of earnings. Uncertainty around program participation can relax the incentive compatibility constraint for high-ability individuals, reducing their incentive to masquerade as low-ability in order to become eligible, and thereby leaving more resources available to those most in need.

In this paper, I address how capacity constraints affect the targeting of social programs and their optimal design by developing a model of welfare program participation under asymmetric information. The model illustrates how capacity limitations can function as a screening mechanism, leaving more resources available to be distributed among those most in need.

Author

• Ines Badin, University of California, Davis