Ex-ante simulations of direct and indirect effects of welfare reforms

This paper estimates an ex-ante structural model that incorporates behavioral labor responses to analyze the distributive impacts of a long proposed reform in Ecuador: the shift from regressive consumer gas subsidies to the progressive Human Development Bonus (HDB). Even the most radical reform options may not have the expected sizeable distributive gains. This is the case even after the targeting instrument, SelBen, substantially corrects the current targeting deficiencies of the HDB. Poverty reduction is maximized (reduing poverty by about five percentage points) when the targeting instrument redirects resources to households close to the pre-reform poverty line. Most of this estimated impact accrues from direct effects with a minimal contribution from indirect effects. Labor-driven indirect effects are multiple and complex, tending to cancel out one another.