Take it or Leave it : Optimal Transfer Programs, Monitoring and Takeup

This paper studie the optimal income redistribution and monitoring when disability benefits are intended for disabled people but where some able agents with high distastes for work mimic them (type II errors). Labour supply responses are at the extensive margin and endogenous takeup costs burden disabled recipients (due to a reputational externality caused by cheaters or due to a snowball effect). Under a non-welfarist criterion which does not compensate for distaste for work, (inactive) disabled recipients get a strictly lower consumption than disabled workers. The usual conditions under which the optimal transfer program is a Negative Income Tax or an Earned Income Tax Credit are challenged, due to monitoring. We also show that even if perfect monitoring is costless, it is optimal to have type II errors. These results are robust to a utilitarian criterion. Numerical simulations calibrated on US data are provided