Behavioural Re-design of Subsidies

V. Kumaraswamy


Since the1850s several countries, especially democracies, have ostensibly taken measures to correct inequalities in income and wealth through welfare interventions. Welfare states like France and Nordic countries spend close to a third of their income for such social interventions through subsidies. However, subsidy programmes have often been badly designed and yet, due to political compulsions, States are unwilling to curb their growth, or weed out inefficient ones or leakages to undeserving beneficiaries. This calls for a relook at options in design so that equality can be achieved with minimal loss of efficiency. Over the last two decades,  the newly emerging science of behavioural economics has given insights on how human beings decide and in what way it can be influenced to facilitate better social benefits besides optimising business decisions. This paper discusses several suggestions for redesign so that subsidies become more rational both at the individual level and for the society. Well-designed subsidies need not leave the State or the taxpayers frustrated. It rounds up with making suggestions on redesign of the most ill designed subsidy at the State level in India, namely, power for agriculture.

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