Optimal Cash Transfers and Microinsurance to Reduce Social Protection Costs

Design and implementation of appropriate social protection strategies is one of the main targets of the United Nation’s Sustainable Development Goal (SDG) 1: No Poverty. Cash transfer (CT) programmes are considered one of the main social protection strategies and an instrument for achieving SDG 1. T...

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Autores principales:	Azcue, Pablo, Constantinescu, Corina, Flores-Contró, José Miguel, Muler, Nora
Formato:	info:eu-repo/semantics/preprint
Lenguaje:	Inglés
Publicado:	Arxiv 2025
Materias:	Seguridad social Ayuda estatal Pobreza Toma de decisiones Social Security State aid Poverty Decision making
Acceso en línea:	https://repositorio.utdt.edu/handle/20.500.13098/13817
Aporte de:	Repositorio Digital Universidad Torcuato Di Tella de Universidad Torcuato Di Tella

id	I57-R163-20.500.13098-13817
record_format	dspace
spelling	I57-R163-20.500.13098-138172025-11-18T05:01:37Z Optimal Cash Transfers and Microinsurance to Reduce Social Protection Costs Azcue, Pablo Constantinescu, Corina Flores-Contró, José Miguel Muler, Nora Seguridad social Ayuda estatal Pobreza Toma de decisiones Social Security State aid Poverty Decision making Design and implementation of appropriate social protection strategies is one of the main targets of the United Nation’s Sustainable Development Goal (SDG) 1: No Poverty. Cash transfer (CT) programmes are considered one of the main social protection strategies and an instrument for achieving SDG 1. Targeting consists of establishing eligibility criteria for beneficiaries of CT programmes. In low-income countries, where resources are limited, proper targeting of CTs is essential for an efficient use of resources. Given the growing importance of microinsurance as a complementary tool to social protection strategies, this study examines its role as a supplement to CT programmes. In this article, we adopt the piecewise-deterministic Markov process introduced in Kovacevic and Pflug (2011) to model the capital of a household, which when exposed to large proportional capital losses (in contrast to the classical Cramér–Lundberg model) can push them into the poverty area. Striving for cost-effective CT programmes, we optimise the expected discounted cost of keeping the household’s capital above the poverty line by means of injection of capital (as a direct capital transfer). Using dynamic programming techniques, we derive the Hamilton–Jacobi–Bellman (HJB) equation associated with the optimal control problem of determining the amount of capital to inject over time. We show that this equation admits a viscosity solution that can be approximated numerically. Moreover, in certain special cases, we obtain closed-form expressions for the solution. Numerical examples show that there is an optimal level of injection above the poverty threshold, suggesting that efficient use of resources is achieved when CTs are preventive rather than reactive, since injecting capital into households when their capital levels are above the poverty line is less costly than to do so only when it falls below the threshold. Azcue, P., Constantinescu, C, Flores-Contró, José Miguel y Muler, N. (2025). Optimal Cash Transfers and Microinsurance to Reduce Social Protection Costs. Arxiv. https://doi.org/10.48550/arXiv.2511.07431 Arxiv 2025-11-17T16:19:06Z 2025-10-30 info:eu-repo/semantics/preprint https://repositorio.utdt.edu/handle/20.500.13098/13817 eng Arxiv info:eu-repo/semantics/openAccess https://arxiv.org/licenses/nonexclusive-distrib/1.0/license.html 42 p. application/pdf application/pdf
institution	Universidad Torcuato Di Tella
institution_str	I-57
repository_str	R-163
collection	Repositorio Digital Universidad Torcuato Di Tella
language	Inglés
orig_language_str_mv	eng
topic	Seguridad social Ayuda estatal Pobreza Toma de decisiones Social Security State aid Poverty Decision making
spellingShingle	Seguridad social Ayuda estatal Pobreza Toma de decisiones Social Security State aid Poverty Decision making Azcue, Pablo Constantinescu, Corina Flores-Contró, José Miguel Muler, Nora Optimal Cash Transfers and Microinsurance to Reduce Social Protection Costs
topic_facet	Seguridad social Ayuda estatal Pobreza Toma de decisiones Social Security State aid Poverty Decision making
description	Design and implementation of appropriate social protection strategies is one of the main targets of the United Nation’s Sustainable Development Goal (SDG) 1: No Poverty. Cash transfer (CT) programmes are considered one of the main social protection strategies and an instrument for achieving SDG 1. Targeting consists of establishing eligibility criteria for beneficiaries of CT programmes. In low-income countries, where resources are limited, proper targeting of CTs is essential for an efficient use of resources. Given the growing importance of microinsurance as a complementary tool to social protection strategies, this study examines its role as a supplement to CT programmes. In this article, we adopt the piecewise-deterministic Markov process introduced in Kovacevic and Pflug (2011) to model the capital of a household, which when exposed to large proportional capital losses (in contrast to the classical Cramér–Lundberg model) can push them into the poverty area. Striving for cost-effective CT programmes, we optimise the expected discounted cost of keeping the household’s capital above the poverty line by means of injection of capital (as a direct capital transfer). Using dynamic programming techniques, we derive the Hamilton–Jacobi–Bellman (HJB) equation associated with the optimal control problem of determining the amount of capital to inject over time. We show that this equation admits a viscosity solution that can be approximated numerically. Moreover, in certain special cases, we obtain closed-form expressions for the solution. Numerical examples show that there is an optimal level of injection above the poverty threshold, suggesting that efficient use of resources is achieved when CTs are preventive rather than reactive, since injecting capital into households when their capital levels are above the poverty line is less costly than to do so only when it falls below the threshold.
format	info:eu-repo/semantics/preprint
author	Azcue, Pablo Constantinescu, Corina Flores-Contró, José Miguel Muler, Nora
author_facet	Azcue, Pablo Constantinescu, Corina Flores-Contró, José Miguel Muler, Nora
author_sort	Azcue, Pablo
title	Optimal Cash Transfers and Microinsurance to Reduce Social Protection Costs
title_short	Optimal Cash Transfers and Microinsurance to Reduce Social Protection Costs
title_full	Optimal Cash Transfers and Microinsurance to Reduce Social Protection Costs
title_fullStr	Optimal Cash Transfers and Microinsurance to Reduce Social Protection Costs
title_full_unstemmed	Optimal Cash Transfers and Microinsurance to Reduce Social Protection Costs
title_sort	optimal cash transfers and microinsurance to reduce social protection costs
publisher	Arxiv
publishDate	2025
url	https://repositorio.utdt.edu/handle/20.500.13098/13817
work_keys_str_mv	AT azcuepablo optimalcashtransfersandmicroinsurancetoreducesocialprotectioncosts AT constantinescucorina optimalcashtransfersandmicroinsurancetoreducesocialprotectioncosts AT florescontrojosemiguel optimalcashtransfersandmicroinsurancetoreducesocialprotectioncosts AT mulernora optimalcashtransfersandmicroinsurancetoreducesocialprotectioncosts
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Optimal Cash Transfers and Microinsurance to Reduce Social Protection Costs

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