Introducing and Estimation of Optimal Group Targeting Method for Allocating Subsidies: A Case Study of Urban Households in Iran

This study aimed to compare the various economic and social characteristics of Iran’s urban households to determine the most effective characteristics for targeting subsidies in Iran. To this end, this article introduced a new numerical algorithm, where this method is conceived to find the optimal group transfers that allow the largest possible reduction in any additive poverty indexes. The income-expenditure data of rural Iranian households in 2020 was utilized in this study. Three indicators (including: quality of targeting, inclusion, and exclusion errors) were used to evaluate the efficacy of this method. The result indicates that, for the headcount ratio, the targeting efficiency varied between 17.1% and 22.2% based on different household characteristics, the population coverage rate varied between 79.76% and 100%, and the sum of the inclusion and exclusion errors varied between 33.55 and 40.24%. Furthermore, if the targeting is based on the poverty gap index, the targeting efficiency ranges between 57.39 and 71.86%, the population coverage rate ranges between 23.29 and 100%, and the sum of the exclusion and inclusion errors range between 33.55 and 40.23%. Moreover, once the poverty severity index was used as the basis for targeting, the targeting efficiency changed from 59.26% to 74.62%, the population coverage rate changed from 80.54% to 100%, and the sum of the inclusion and exclusion errors changed from 33.33% to 40.23%. Based on the findings, the family size was selected as characteristic for targeting households, where targeting efficiency was 74.62% when targeting was based on family size. Finally, the population coverage rate was 86.37; the exclusion error was 4.60, and the inclusion error was 30.30.