General Equilibrium Program Evaluation Gap in Scaled Interventions

In Simple Words

Imagine giving discount grocery vouchers to half the families in an isolated village. A standard test only checks if those receiving vouchers eat better, but when half the village uses vouchers to buy more food, the local store owner raises prices for everyone. As a result, families without vouchers are left worse off because food costs more than before, an unintended consequence missed if price changes are ignored.

Research question

Standard micro-level program evaluations measure treatment effects strictly on targeted beneficiaries, failing to account for market price adjustments. When interventions are scaled up, aggregate general equilibrium price shifts can generate spillovers that alter or reverse net welfare impacts for non-treated populations.

Participants

4,706 landless agricultural wage workers and 1,585 cultivating households across 63 rural Indian villages.

Study Design

Clustered RCT evaluating market-level wage spillovers by randomizing insurance offer intensity across village labor markets.

Results

Marketing insurance exclusively to cultivators reduces drought wages for landless laborers by 0.63 log points at the 30th percentile of rainfall, demonstrating that partial-equilibrium evaluations miss severe welfare losses among non-treated groups.

Takeaway

Incorporate general equilibrium market price and wage estimations into program evaluation designs before scaling social or financial interventions.

Read alongside the research

Plain-English glossary

Original explanations, informed by the references below. Examples are illustrations, not data from the studies above. The research text stays unchanged.

Randomized controlled trial

A study that uses chance, like drawing lots, to decide who receives each option being compared. Researchers compare the groups’ outcomes to estimate the effect of those options.

ExampleA lottery assigns volunteers to a training programme or a comparison group. Researchers then compare their outcomes.

GET-IT glossary · Randomized study ↗Read more about randomized controlled trial →

Related findings

• Cultivator Risk-Taking and Labor Demand Volatility →Economics (general)

  Imagine a factory owner who usually manufactures simple wooden chairs because wooden chairs do not break if the factory roof leaks during a storm. If an insurance company guarantees to pay the factory owner every time a storm leaks through the roof, the owner immediately switches to building high-end electronic gadgets that produce huge profits during dry weather but get ruined in a rainstorm.

• Dual-Market Side Insurance Neutrality →Economics (general)

  Think of a tug-of-war game between store owners who want to cut wages during slow periods and shop assistants who demand higher pay. If only store owners receive insurance, they aggressively expand or contract hiring based on the weather, causing wild wage swings.

• Indirect Wage-Mediated Insurance Externalities →Economics (general)

  Imagine a fleet of taxi drivers in a city where fares drop drastically whenever it rains heavily. If a third of the taxi drivers buy rain insurance and receive a cash payout on rainy days, those insured drivers choose to stay home and rest instead of driving.

• Insurable Interest Exclusion and GE Welfare Spillover →Economics (general)

  Imagine a law that allows shop owners in a town to buy fire insurance, but forbids the shop employees from buying unemployment insurance. When shop owners buy fire insurance, they stock their shelves with fragile glass statues that yield huge profits when safe, but shatter instantly during fires.