December 20, 2006Public Policy

Rational Karnataka

Incentives matter

This is an archived blog post from The Acorn.

There are 10.2 million families in Karnataka. The state government wanted to issue Below Poverty Line” cards to those families that were, well, below the poverty line. The BPL card, presumably, would entitle the needy families to government subsidies and suchlike.

9.3 million families, or 91% of the total number of families in the state applied for one (via Abi). That’s before they even received the applications from the greater Bangalore region. The poverty line, by implication, has shot through the roof. No one — not even the looniest, leftmost, Leftist would argue that the population of Karnataka is in such dire straits. Rather, the situation arose because he undeserving had also applied for BPL cards and that some families had applied for more than one card’. Why? With over Rs 1100 crore (US$242 million) worth of goodies on offer, why not?

It is perfectly rational behaviour for the 9.3 million families to apply to be considered very poor. They are merely responding to incentives. Just like it is perfectly rational for communities to clamour for the backward” caste label and gain a place on the reserved table. Perverse incentives lead to perverse behaviour, and ultimately, to perverse outcomes.

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