Proxy Means Tests for Targeting Social Programs
Authors: Grosh, Margaret E.; Baker, Judy L.
Publication date: July 1995
This paper examines how a proxy means test might work in targeting social programs. The term "proxy means test" is used to describe a situation where information on household or individual characteristics correlated with welfare levels is used in a formal algorithm to proxy household income, welfare or need. Given the administrative difficulties associated with sophisticated means tests and the inaccuracy of simple means tests, the idea of using other household characteristics as proxies for income is appealing. This paper carries out simulations on data sets from Jamaica, Bolivia and Peru to explore what kind of information can best be used in a proxy means test and how accurate such tests might be expected to be. The results show that household characteristics can serve as reasonable proxies for information on income in assessing eligibility for social programs. More information is generally better than less, though there are diminishing returns. The proxy systems all have significant errors of undercoverage, but they cut down leakages so much that the impact on poverty is better with imperfect targeting than with none. Some fine-tuning of the basic system, such as calibrating for the poorest half of the population, improves results considerably. In Jamaica, calibrating separately for rural and urban areas did not improve results. As assumed 25 percent level of distortion of information had no effect at all on targeting outcomes. The paper describes the practical experience with Chile's Ficha CAS system, one of the oldest and best-known proxy means tests in the developing world. It also discusses in qualitative terms some of the strategic choices and implications in setting up proxy means tests of different sorts. The amount of staff time, the amount of training required for staff at different levels, the number of computers, and the transport and communications links required will vary greatly depending on the decision regarding how the system should be set up.