Universal Basic Income and the Problem of Information Asymmetry

Abstract

This article focuses on economic analysis of the concept of universal basic income. This social assistance scheme is regarded as an alternative to traditional targeted, means-tested, social benefits. The paper elaborates on what distinguishes universal basic income from other forms of social benefits, and analyzes some of the most widespread arguments in its favor. A hypothetical implementation of basic income could not only generate social and economic gains, but would also inevitably be associated with certain costs. In particular, given that for some individuals with medium and high incomes basic income payments would in essence be a tax deduction, taxes would need to be raised in order to balance out the state budget. This would lead to additional administration costs. As demonstrated in the article, they should be interpreted as costs of reduction of information asymmetry, which inevitably arises in the relation between the state and recipients of social assistance. It is shown that the economic side of a number of key arguments for basic income boils down to the latter making it possible to reduce information asymmetry. These arguments include the assertions that universal basic income would make the welfare system simpler and more manageable, eliminate poverty traps and expand the freedom of choice among social benefit recipients. The information asymmetry approach is applied to the analysis of preliminary results of the basic income experiment conducted in Finland in 2017-2018. The paper provides evidence that basic income is only one of the many possible approaches to reducing information asymmetry in welfare systems.