A new look at the distributive incidence of Chile’s means-tested water subsidy scheme

Abstract

Chile employs subsidies to reduce the bill paid by lower-income households for piped water and sanitation. Previous research has concluded that this system has a lower Gini coefficient (0.29) than expected, meaning it is not appropriately targeted to low-income households. This paper takes a new approach to assessing the subsidy system, taking advantage of Chile’s 2016 adoption of a new means-test instrument in the welfare system. We refine the analysis by (1) discarding data arising from rural unconnected households, on the theory that they cannot feasibly be connected to piped water systems and thus cannot use the subsidy; (2) recognizing Chile’s use of an equivalence scale to adjust household incomes for household size and relative disadvantage, and (3) adjusting the analysis to reflect the different tariff levels across the country. With these adjustments, the Gini coefficient of benefits increases to 0.47, meaning that the Chilean subsidy program is in fact meeting its goal of targeting assistance to those who need it. In other words, previous research has underestimated the targeting progressivity of the Chilean subsidy scheme. We also use the Shapley value to apportion the improvement from 2015 to 2022 among the various changes introduced in the analysis.