A political-economy perspective on social expenditures: corruption and in-kind versus cash transfers

This paper presents a novel political-economy perspective on the composition of social expenditures. We take into account the possibility that institutions are weak, i.e. there is corruption, and analyze how this affects the government’s choice between cash and in-kind transfers. Our results show that the share of in-kind transfers (e.g. basic health care, public housing or food stamps), whose appropriation by corrupt politicians is more easily observed than in the case of cash transfers, increases with corruption. This positive relationship exists, however, only in highly democratic countries. We argue that voters use their political influence in democratic countries to ensure that a higher share of transfers is provided in kind thereby shielding transfers from appropriation by corrupt politicians.