Abstract:
Pervasive corruption and evasion often undermine the provision of public programs. I study a major policy change in fuel subsidy administration in India, which enabled a direct bank transfer of benefits to verified beneficiaries. This study exploits two quasi-experiments — a phase-wise policy roll-out and its unexpected termination under a universal fuel subsidy program, and a unique dataset combining 23 million transactions and black-market fuel prices. Increased enforcement decreased subsidized-fuel purchase, indicating a significant reduction in subsidy leakage. Reduced diversion of subsidized fuel further changed equilibrium black-market fuel prices, resulting in lower fuel tax evasion. This study illustrates how states can improve welfare delivery systems.