Cash Transfers and the Local Economy: Evidence from Brazil

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Cash transfer programs became ubiquitous in developing countries and have been credited for sizable reductions in poverty. However, their potential disincentive effects on labor supply have spurred a heated policy debate on the economy-wide effects. This paper studies the impact of the main Brazilian cash transfer program, Bolsa Familia, on the local economy. We find that an expansion of the program positively affected the local economy - employment, banking activity, GDP - using variation in the size of the reform across municipalities. The evidence is consistent with multiplier effects of cash transfers, which dominate potential negative effects on labor supply among beneficiaries. These positive economy-wide effects can double the marginal value of public funds of Bolsa Familia, going from below the value of a non-distortionary transfer to a value well above its resource cost.