Conditional cash transfers and education quality in the presence of credit constraints

We investigate the relative merits of unconditional cash transfers (UCT), conditional cash transfers (CCT), and the effects of improvements in education quality on efficiency and welfare. In our setting, some parents underinvest in their children's education because capital market imperfections prevent them from borrowing. Under sufficiently accurate targeting, CCT are more effective than UCT in enhancing the efficiency of these households’ decisions. However, UCT is superior to CCT in terms of welfare unless targeting is perfect, in which case UCT and CCT are equivalent. Education quality is welfare improving, but may not be efficiency enhancing when public education quality is very low.

► We study the impact of cash transfers and school quality on efficiency and welfare. ► We consider credit constrained households that decide on the time their children spend at school. ► CCT are more effective than UCT in enhancing efficiency if targeting is sufficiently accurate. ► UCT and CCT are equivalent in terms of welfare if targeting is perfect, otherwise UCT is better. ► Education quality is welfare improving, but may not enhance efficiency when quality is very low.