Public Finance, Governance, and Cash Transfers in Alleviating Poverty and Inequality in Chile

As the Chilean government seeks to reduce poverty and inequality through cash transfers to poor households, local governments are responsible for both identifying the poor and allocating transfers. Until recently, however, evaluating the effectiveness of local governments in enacting these policies has been restricted by data limitations. This paper builds on recent evidence that cash transfers have highly variable impacts on poverty and inequality at the county level. In particular, we explore how local public finance and the strength of the governing mandate influence the efficiency of cash transfers. With a richly specified model, we find that public spending on goods and services, the fraction of available subsidies claimed by the local government, and the share of county land that is zoned for industrial purposes are all correlated with considerable reductions in poverty and inequality. In addition, the strength of the governing mandate weakly influences the efficiency of transfers in reducing poverty, but not inequality. These results demonstrate that a better understanding of such institutions can lead to more efficient targeting for social programs.