There's No Such Thing As a Free Lunch: Evidence From The Effect Of In-Kind Transfers

Economists have frequently argued that cash transfers are to be preferred to in-kind transfers. However, the argument is strictly true only where there are no market failures, and there are several arguments in favour of in-kind transfers that are valid in these circumstances In-kind transfers are often used where policy may be specifically concerned with the welfare of the recipient but a cash transfer cannot be made directly to the intended recipient. This might be the case with basic health care and education services for children where cash transfers would have to be made via the parents who might choose to spend such cash in a different fashion. This is called the agency problem. A second argument relates to the desire to exploit the stigma associated with visibly being in receipt of some transfer, in order to improve the targeting of such transfers to the most needy. This may be most relevant where recorded income may not be a good indicator of well-being such as may be the case in an economy with a large underground. The essence of this argument is that only the genuinely poor find it worthwhile to participate in the programme if it is stigmatised. In order to encourage only the poorest to select themselves into the programme the quality of the in-kind provision may have to be low: if the quality is a normal characteristic of a good then few of the richest will participate if the quality is low since they prefer a higher quality at the market price. Both of these arguments suggest that an in-kind transfer is not valued as highly as cash by the recipients: in the first case because the agent cannot trade the transfer for cash from which rent could be extracted; and in the second case because the value of the transfer is net of the costs of the stigma. The fact that in-kind transfers are worth less than cash but worth more to the poor than to the rich, offers the attractive prospect of being able to both relieve poverty and improve work incentives. In fact, in-(This abstract was borrowed from another version of this item.)