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Prepared by David Coady and Nghia Piotr Le (FAD).
This ignores the issue of work disincentives related to the withdrawal of benefits as income increases, which is a concern in all countries regardless of level of development. The theory of optimal income distribution emphasizes the important role of gradual withdrawal of means-tested benefits with income levels to efficiently manage the trade-off between work disincentives (efficiency) and redistribution (equity) (Picketty and Saez, 2013).
Note also that categorical targeting can reduce efficiency costs when the categories (or “tags”) used are linked to household or individual characteristics that cannot be easily changed or hidden.
Although child benefits are often described as being “universal,” from a redistributive perspective they are just a different form of targeting based on the demographic composition of a household.