Theory Seminar - Subsidy Allocations to Economically Disadvantaged Agents in the Presence of External Shocks

Speaker: Rediet Abebe, Cornell University

Title: Subsidy Allocations to Economically Disadvantaged Agents in the Presence of External Shocks

Abstract: Poverty and economic hardship are understood to be highly complex and dynamic phenomena. Due to the multi-dimensional nature of economic welfare, assistance programs targeted at these problems can face challenges, as they often rely on simpler measures of economic hardship such as income or wealth that fail to capture to full complexity of economic welfare. In this paper, we explore one important dimension -- susceptibility to income shocks. We introduce a model of economic welfare that incorporates income, wealth, and income shocks. We analyze this model to show that it can vary, at times substantially, from measures of economic welfare that only use income or wealth.

We then explore how to allocate subsidies in the presence of income shocks. We consider two well-studied objectives: the first aims to minimize the expected number of agents that fall below a given welfare threshold and the second aims to minimize the likelihood that the most vulnerable agent falls below this threshold. We consider subsidies to agents' income and wealth and give an efficient optimal allocation mechanism for the second objective. Likewise, we show that we can give an optimal allocation mechanism for the first objective under natural assumptions on the agents' wealth and shock distributions. For the general case, we give fully polynomial-time approximation scheme (FPTAS) to optimize for the first objective. We conclude with a discussion contextualizing our work in the broader literature on measuring poverty and economic welfare and a discussion about targeting vs. universalism in poverty alleviation programs.

Joint work with Jon Kleinberg (Cornell) and Matt Weinberg (Princeton)