Welfare effects of deterrence-motivated activation policy

We investigate whether activation policy is part of optimal policy of a benevolent government, when the motivation for introducing activation is to deter some people from collecting benefits. The government offers a pure benefit programme and an activation programme, and individuals self-select into programmes. Individuals differ with respect to disutility and wage. Activation programmes are relatively costly and favour individuals who are relatively well off. Hence, for activation policy to used, labour supply effects have to be relatively small. We discuss how labour supply effects depend on the distribution of wage and disutility, and discuss previous literature in this light.