Proxy means tests generate a score for applicant households based on fairly easy to observe characteristics of the household such as the location and quality of its dwelling, its ownership of durable goods, demographic structure of the household, and the education and, possibly, the occupations of adult members. The indicators used in calculating this score and their weights are derived from statistical analysis (usually regression analysis or principal components) of data from detailed household surveys of a sort too costly to be carried out for all applicants to large programs. The information provided by the applicant is usually partially verified by either collecting the information on a visit to the home by a program official or by having the applicant bring written verification of part of the information to the program office. Eligibility is determined by comparing the household’s score against a predetermined cutoff.
The advantage of proxy means testing is that it requires less information that true means testing, and yet is objective. Moreover, because it does not measure income itself, it may discourage work effort less than a means test would. There are some drawbacks. Administering it requires a large body of literate and probably computer-trained staff, moderate-to-high levels of information and technology. There is also an inherent inaccuracy at household level, since the formula is only a prediction, though good results on average have been observed. The formulae used usually rely on indicators that are fairly stable and may distinguish well chronic poverty, but can be insensitive to quick changes in household welfare or disposable, which may be frequent and large when an economy is suffering a large downturn. Moreover, the formula and results may seem mysterious or arbitrary to some households and communities.
Proxy means tests are most appropriately used where there is reasonably high administrative capacity, for programs meant to address chronic poverty in stable situations, and where they are used to target a single program with large benefits or to target several programs so as to maximize return for fixed overhead.