Why Corruption Makes Universal Basic Income Better Than Targeted Welfares 

Should developing countries like India continue targeting welfare to the poorest, or instead implement a universal basic income? This question has loomed large in the development literature, and there is substantial support for the position that because developing nations like India have limited resources to combat poverty, even if targeting is imperfect, it makes more sense to pursue targeted policies than to provide a UBI. Put differently, it often makes more sense to give a larger amount of money to those people who seem to be the poorest rather than a smaller amount to everyone.

But this logic rests on a crucial assumption: that targeting works as intended. What if it doesn’t? What if corruption, bribery, and what economists call “rent-seeking” by local officials distort who receives support and who is left behind? 

Recent research sheds valuable light on this question. By incorporating real-world corruption into economic models of redistribution, the case for targeted transfers begins to falter, and a compelling argument for UBI emerges. 

Corruption Costs
The authors of this research build a theoretical model that incorporates rent-seeking behaviour into the design of redistributive policies, using data from the India Human Development Survey (IHDS-II), supplemented with evidence on bribe-taking from other surveys. They then calibrate a model without rent-seeking and find that optimal targeting covers around 63% of the population—well short of universality but higher than traditional narrowly targeted schemes. However, this model cannot replicate observed benefit distribution patterns, particularly the low benefit receipt among the poorest households under study.

When rent-seeking is added to the model, the calibration improves significantly. The model incorporates bribes that households must pay to increase the likelihood of their being selected to receive transfers. The result aligns much more closely with observed patterns: the poorest households are underrepresented in welfare programmes, while others succeed in manipulating the system to their advantage.

Once this corruption is accounted for, the conclusion is stark: the UBI becomes the optimal policy. 

Universal Edge
Why does UBI win when rent-seeking is present? Quite simply because it eliminates the gatekeepers. With a UBI, eligibility is automatic, universal, and free from bureaucratic filtering. There is no need to bribe an official, no paperwork or discretion involved. In corrupt environments, this eliminates opportunities for misallocation, making the system not only fairer but also more efficient. 

Two other points deserve mention. First, in the rent-seeking model, the UBI results in a welfare gain that is equivalent to a 4.5% increase in consumption, within the same budget. In this regard, even if bribes under study are reduced by about 90%, the UBI is still optimal. Second, the authors of the research test various model parameters and find that their basic conclusion remains valid: UBI is optimal only when rent-seeking is modelled. In its absence, targeted transfers perform better. 

Policy Rethink
Robustness checks further strengthen the findings. Across multiple parameter variations, the results hold: when corruption exists, universality outperforms targeting. Importantly, the research highlights that rent-seeking isn't just a theoretical concern. It significantly influences real-world policy outcomes, and therefore must be incorporated into economic models of redistribution.

This research provides a compelling case for a UBI in India, demonstrating that the costs of rent-seeking and administrative inefficiencies associated with targeted transfers outweigh their theoretical benefits. In contexts like India, where the administrative state is often leaky and rent-seeking is entrenched, a UBI may just be a more practical and equitable solution. 

This is not a blanket argument for UBI everywhere, nor a dismissal of targeting in all contexts. 

By modelling real-world data and accounting for corruption, the authors of this research demonstrate that a UBI can deliver superior welfare outcomes, particularly for the poorest households. In addition, this research underscores the salience of considering institutional weaknesses, like corruption, when designing social welfare policies in developing countries. Ultimately, we learn that it would be a good idea to shift towards universality in India’s redistribution programmes to effectively combat existing inefficiencies and inequities.

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