This paper introduces cash transfers targeting the poor in an incomplete markets

model with heterogeneous agents facing idiosyncratic risk. These transfers change the

degree of insurance in the economy and aect precautionary motives asymmetrically,

leading the poorest households to decrease savings proportionally more than their

richer counterparts. In a model economy calibrated to Brazil, once the cash transfer

program is adopted, wealth inequality and social welfare increase, poverty decreases,

while employment and income inequality remain about the same. Imperfect access to

nancial markets is important for these results, whereas whether the program is funded

with lump sum or distortive taxes is not.

Texto para discussão no. 598

2011

Eduardo Zilberman. Tiago Couto Berriel.

td598.pdf