Nova workboard

a blog from young economists at Nova SBE

In-kind Transfers and Consumer Behavior

It is a known result in microeconomics that, when it comes to social welfare provision, cash transfers are preferable and more efficient than in-kind transfers. That is, it is preferable to provide low-income agents with cash subsidies and let them conduct their own choices according to their preferences than to distort the consumption patterns with in-kind subsidies, like food stamps, which restrict the consumers’ choices. This is easily derived from the basic economics of the consumer’s problem: agents are assumed to act rationally and to maximize their utility by choosing the bundle which suits them best given their budget constraint, so a deviation from the chosen consumption point may imply either a loss in efficiency or a loss in welfare.

However, some reasons why transfers are mostly provided in-kind are not hard to understand.  Welfare providers may take on this measure as a paternalistic way to ensure welfare money is spent in what is perceived to be essential for the well-being of the recipients. So, for instance, one of the reasons for the existence of food stamps is to ensure recipients allocate at least that specific part of their transfers in foodstuffs, thus attempting to distance agents from behaviors that may overlook what is best for them in favor of more attractive alternatives.

But do the food stamps completely solve the problem? Truth is that, as empirical evidence shows, welfare recipients spend a significant percentage of their food-stamp transfers in more expensive brands, rather than choosing generic, cheaper food products which would yield a higher caloric intake and would allow them to purchase more in quantity. So again, even though agents are being led in the right path, there is still room for improvement in terms of their choices, as there is a perceived loss in welfare – beneficiaries could consume more each period by resorting to cheaper products, but are choosing brands over quantity.

The problem now is what can be done get around these choices. Consumers are expected to make choices which maximize their welfare at the lowest cost, but seem to take a different road. Instead composing a bundle which allows them to attain the lowest possible cost, the low-income recipients choose to include expensive brands in their bundle, either out of taste or status. But consumers already have their choices restrained by the in-kind subsidy – should the providers restrain them even more, say, by making food-stamps exclusive to some cheaper brands?

There is no clear answer to this issue. While it may be advocated that recipients should be somehow taught to choose appropriately given their constraints, it can be also claimed that deviating agents from their previous bundle is immoral and implies a welfare loss, as they already choose optimally. The decision will then be left at the discretion of the policy makers, on whether they merely wish to provide cash transfers and allow agents to choose freely or to drive consumption to a certain desired path. 




Author: studentnovasbe

Master student in Nova Sbe

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