Transfer Program Complexity and the Take-Up of Social Benefits

We model complexity in social programs as a by-product of the screening process. While a more rigorous screening process may improve targeting efficiency, the associated complexity is costly to applicants and induces incomplete take-up. We integrate the study of take-up with the study of rejection (Type I) and award (Type II) errors, and characterize optimal programs when policy makers choose screening intensity (and complexity), an eligibility rule, and a benefit level. Consistent with many real-world programs, optimal programs feature high complexity, incomplete take-up, classification errors of both Type I and II and, in some cases, "excessive" benefits. (JEL D04, D82, H23, 118, 138) United States operates a large number of social programs offering support to those in need. This includes cash assistance to the poor, food stamps, health insurance, housing programs, child care support, and social security to the aged, blind and disabled. We observe several differences in the design and outcomes of these programs. One difference lies in the degree of targeting to selected groups of individuals viewed as "deserving." Although the US welfare state in general relies on a much higher degree of targeting than most other countries, there is substantial variation in targeting across different programs within the US. At one end of the spectrum, the Medicare program is almost universal, while at the other end of the spectrum, disability insurance programs serve a relatively small population satisfying very stringent eligibility criteria. A second difference lies in the way social programs are administered and in their degree of complexity. Targeted programs tend to be characterized by a substantial amount of complexity and administrative hassle, whereas universal programs are simpler and more transparent. A third difference lies in the take-up of social benefits. Incomplete take-up among intended recipients is an important issue in all means-tested programs in the US, but there is huge varia