Conditional cash transfers, in which parents receive payment only after their child''s development has satisfied some performance criteria, are the most cost-effective way to make a real difference to the lives of disadvantaged children. That is the central conclusion of research by Daniela Del Boca, Christopher Flinn and Matthew Wiswall, which is published in the Economic Journal.

Their study analyses a variety of parental investments in children – including mothers'' and fathers'' time with children and expenditures on goods for children – and the impact of three types of transfer programmes on children''s test scores – unrestricted transfers, restricted transfers and conditional cash transfers.

They find that while each of the programmes drives improvements in ''child quality'', the last type is the most cost-effective: as the targets for children''s development increase, households face greater incentives for investments and adjust their behaviour to satisfy the performance criterion and earn the reward.

The researchers note that over the past few decades, there has been great interest in exploring the efficacy of various types of cash transfer programmes aimed at supporting household investments in child development.

The majority of programmes have been traditional ''means-tested'' cash transfers (restricted to needy families) but their use was not ''conditional'' on the type of spending or on the completion of desirable actions by the beneficiary (for example, relative to education, work or health).

While it can be concluded that these programmes helped to reduce the poverty of these families and, in part, of their children, we do not have a clear understanding of the optimal form these interventions should take or their longer-term consequences.

The new study uses a model of household behaviour and child development developed in the authors'' previous work (Del Boca et al, 2014) to investigate how different performance criteria and reward levels change incentives for child development. Their model is a dynamic child development production technology with a large set of inputs into the production process, which the household chooses given a dynamically evolving resource constraint. It also incorporates heterogeneity in household preferences.

The authors use data from the US Panel Study of Income Dynamics, to measure and compare the impact of three types of transfer programmes on the test scores of young children:

  • The first consists of a programme in which the household receives a lump sum transfer with no restrictions on its use (unrestricted transfers).
  • The second type consists of a programme that allows the households to receive the amount only if they spend the transfers received on child investment goods or services (restricted transfers).
  • The third programme allows families to receive the transfers only after the child''s measured development satisfies some performance criteria (conditional cash transfers).

The authors'' simulation results show that unrestricted weekly transfers imply increasing average gains in child quality and a decrease in labour supply so that parents spend more time with the child.

When households receive a restricted transfer, and are required to spend a minimum amount on child goods, child quality also improves. The restriction also implies that the transfer cannot be optimally spent across household consumption and child expenditures to maximise household utility, leading to a decrease in labour hours that is less than in the unrestricted case. This implies that the increase in time with child is also less.

With conditional transfer programmes, average gains in child quality are increasing in both the reward levels and threshold targets. As the target levels increase, households face greater incentives (rewards) for child investments and adjust their behaviour to satisfy the performance criterion and earn the reward.

Comparison of the three transfer programmes shows that:

  • Conditional transfer programmes are the most cost-effective: they have the additional advantage of allowing the households to choose optimally the combination of inputs (time and goods) to meet the performance targets.
  • The programme of restricted transfers is the second most cost-effective: it improves child quality but distorts input mix toward goods expenditures and away from parental time.
  • Unrestricted targets are the most inefficient, but easiest to implement.

These results are coherent with the recent development of several conditional cash transfers programmes in developing countries. An extensive body of research on the assessment of conditional cash transfers shows that these programmes increase school attendance, reduce school dropout rates and increase child health and families'' wellbeing.

''Transfers to Households with Children and Child Development'' by Daniela Del Boca, Christopher Flinn and Matthew Wiswall is published in the October 2016 issue of the Economic Journal. The authors'' previous study is: Daniela Del Boca, Christopher Flinn and Matthew Wiswall (2014) ''Household Choices and Child Development'', Review of Economic Studies 81(1): 137-85. Daniela Del Boca is professor of economics at the University of Turin and a fellow of the Collegio Carlo Alberto. Christopher Flinn is at New York University. Matthew Wiswall is at Arizona State University.