Impact of Cutting Cash Subsidy Transfer to the Rich in a Nonlinear Programming Model for Economic Input-Output Analysis

This paper measures the distributional and welfare impact of cutting commodity subsidy and paying cash subsidy. We introduce an extended Input-Output model employing a non-linear programming approach. The model is calibrated based on 2004 Iranian Micro Consistent Matrix with 56 commodity groups, 10 rural, and 10 urban household groups. Then we calculate Rawlsian welfare, Bentham welfare, and Cobb-Douglass welfare functions. Then the 2010 version of Iranian Economic Reform Plan to cut commodity subsidies and pay them in cash is simulated. We translate the 2010 cash subsidy policy to scale of 2004 data and with special attention to different household dimension. Simulating the policy, we found that equal payment to all individuals can lead to 47% rise in Rawlsian welfare index, and 3.6% higher welfare in Bentham welfare function. Paying cash subsidy to seven expenditure-deciles of households can improve the Rawlsian and Bentham welfare index by 73% and 1.9%, respectively. Although this policy is preferred by equality measures, it decreases the welfare of top 30% rich between 13% to 16%.