Assignment 2

1) The ongoing debate on universal basic income is framed in the discussion of conditional and
unconditional cash transfers. Conditional cash transfers (CCTs) are subsidies in money, goods, or
other types linked to some action by the beneficiary. They generally seek to influence decisions
related to schooling, food, health, or employment. On the other hand, unconditional cash transfers
(UCTs) can also take the form of subsidies, but they are delivered without requiring any active
behavior on the part of the population. Its objective is to relax the budget restrictions of families or
individuals. Given these classifications, the Universal Basic Income is a particular case of a UCT.

CCTs are designed to incentivize desirable actions, covering the associated costs and alleviating
family budget constraints. The evidence supporting CCTs is robust. However, there are compelling
reasons to consider the unconditional alternative. UCTs, by their nature, can streamline the
bureaucratic costs of documenting and verifying the completion of expected actions by the
beneficiary. Moreover, they can prove beneficial in situations where information is incomplete,
offering a more flexible approach.

In this study, we delve into the Bono Calefacción (Heating Voucher), a bonus delivered in the south
of Chile, and its impact on the schooling and health of families. The subsidy is a UCT for households
with a low score on the socioeconomic index that the government uses to classify families in the
country. The subsidy is 100,000 Chilean pesos (108 USD), delivered once a year, and can only be
accessed by families living in the Aysén region. Despite the name of the subsidy, families can spend
that money without restrictions. For reference, Figure 1 is a map of Chile, with the Aysén region
highlighted in yellow on the right side of the image.

Figure 1. Map of Chile

The reason for the existence of this bonus is political. This subsidy was created during the voting of
an important reform for the government of the time and sought to secure the votes of the region's
deputies. Therefore, it is not related to the economic or geographical characteristics of the area.
Although the low temperatures in the region publicly justified the bonus, Aysén is not the
southernmost and coldest area of Chile. Furthermore, families do not have to do anything to obtain
state aid since the subsidy is automatically deposited into a bank account held by each country's
inhabitants.

The treatment is the delivery of $100,000 pesos on the first day of March of each year. In Chile, each
region is divided into communes. Although the region is the one that "receives" the subsidy, the
treated will be the communes that are located to the north and south of the region. The communes
north of Aysén will be compared with those south of Puerto Montt (green area over Aysen). In the
same way, the southern regions of Aysén will be compared with the northern areas of Magallanes
(red area under Aysen). In this way, the control group is made up of the communes bordering Aysén.
This design can be flexible. For example, the treatment group can be all the communes of Aysén, and
the control group can be all the communes of the surrounding regions. The outcomes to be analyzed
are school attendance, number of medical licenses, and self-generated income. These outcomes
were chosen for the following reasons: if families use this additional income to heat the house, it
could reduce family members' student or work absences. Furthermore, we are interested in knowing
whether this subsidy impacts families' short-term employment decisions, an argument that is
sometimes used to oppose unconditional transfers.

2) We will estimate the following regression to find the effect of the subsidy on the chosen outcomes:

y𝑔𝑡 = μ𝑔 + θ𝑡 + ϑ𝑔𝑡 + δTreated𝑔 ∗ post 𝑡 + e𝑔𝑡

y𝑔𝑡 : outcome of group g in time t

μ𝑔 : group fixed effects

θ𝑡 : time fixed effects.

ϑ𝑔𝑡 : group-time fixed effects.

Treated𝑔 : dummy variable is equal to 1 if the group g is treated, and 0 otherwise.

post 𝑡 : dummy variable is equal to 1 since the treatment occurs, and 0 otherwise.

e𝑔𝑡 : error model.

3) We would use an event studio, the specification of which is shown below:

𝑛

y𝑔𝑡 = ∑ 𝛽𝑗 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑔,𝑡+𝑗 + μ𝑔 + θ𝑡 + ϑ𝑔𝑡 + e𝑔𝑡

𝑗=−𝑚

After estimating the equation, we would create a DiD event study figure.

4) In this case, the parallel trends assumption states that if the subsidy did not exist, then the
outcomes of all the communes would move in parallel. For example, the change in school
attendance would be the same for the treatment and control group. The assumption is satisfied
because no other programs, other than the subsidy, have the same characteristics as the
treatment. The fact that the origin of the subsidy is political allows its delivery to be exogenous to the
characteristics of the population and does not respond to problems in education, health, or
employment.

5) We would present a graphical analysis of the trends of our outcomes before the subsidy was given.
The data used in our regression is monthly, so we can show the series' behavior over the years. We
include group-specific linear time trends in our regression, but we would also present our results
without these controls.

6) In the restricted case, we could have only four treatment and four control communes. This
configuration is complex because the two asymptotic assumptions are violated: the number of
groups does not tend to infinity, and the group of treaties does not tend to infinity. Although the model
doesn't meet the requirements, we would use cluster bootstrap and Conley-Taber confidence
intervals to estimate our standard errors.

7) In this case, the SUTVA assumption assumes that the region's subsidy status does not affect
outcomes for other areas. Since the subsidy is delivered to each family, it is difficult for this money
to trickle down to families in other regions. The geography of southern Chile means that the region's
different communes are entirely separated; therefore, spillovers are not possible in the variables we
are analyzing. Students and workers in this part of the country go to schools and jobs within their
region.