The impact of welfare design on consumption patterns of the poor: Evidence from the recent Dibao reform in rural China1

Abstract

In the recent anti-poverty campaign, China's minimum livelihood guarantee program (called Dibao in Chinese) experienced significant changes in that it now includes both cash transfer and special assistances such as education and healthcare subsidies. Therefore, the current Dibao program in China is a composite cash transfer program containing the nature of both unconditional and conditional cash transfers. This paper is the first attempt to examine the impact of a composite cash transfer program on consumption patterns of the poor population by utilizing exogenous variation in the differential size of increases in Dibao subsidy lines across cities. We find that the Dibao reform has a significantly positive effect on total consumption of poor households. In particular, the generosity of this composite cash transfer program increased human capital expenditures to a large extent including expenditures on healthcare and children's education. The Dibao reform also generates positive spillovers such as increasing school enrollment and improving academic performance for children in Dibao families.