The Imperfections of Conditional Programs and the Case for Universal Basic Income

What is the impact of replacing conditional welfare programs with a Universal Basic Income (UBI) that costs the same? We answer this question using a general-equilibrium model with incomplete markets that accounts for three imperfections of conditional programs: incomplete take-up, illegitimate transfers, and administrative costs. We find that these imperfections, particularly incomplete take-up, substantially affect welfare. We also find that replacing the conditional programs with a UBI would increase capital stock, employment, and output, and lower inequality. Yet, the welfare effect of a UBI is not clear-cut. Aggregate welfare would fall in our benchmark, but a moderately larger UBI would be preferable to an equal expansion of conditional programs, especially for the least educated.