Community and anti-poverty targeting

The standard theory of anti-poverty targeting assumes individual incomes cannot be observed, but statistical properties of income distribution in broadly defined groups are known. ‘Indicator targeting’ rules are then derived for the forms of transfers conditioned on group membership of individuals. In this literature the motivating notion of a ‘group’ is purely statistical, even when it is groups such as localities and ethnicities. We focus instead on groups which are ‘communities’, meaning thereby collections of individuals who have access to community-specific public goods, from which non-members are excluded. Such differential access constitutes a source of inequality among poor individuals belonging to different communities, which is not captured by monetary earnings. We show that this formulation of what constitutes a group changes many of the basic results of the indicator targeting literature. Optimal targeting for poverty alleviation leads to seemingly paradoxical rules, such as targeting transfers to the community that is richer. Total wealth of non-poor members of a community and its distribution both become relevant for specifying optimal indicator targeting rules. In addition, a poverty measure that is sensitive to the community identities of poor individuals, yet defined on nominal incomes, may be incompatible with some of the basic axioms in the standard literature on poverty measurement.