The Price Effects of Cash versus In-Kind Transfers

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from NCPA,

A central question in anti-poverty policy is whether transfers should be made in kind (in the form of food or a particular good) or as cash. The oft-cited rationales for in-kind transfers are to encourage consumption of particular goods or to induce less needy individuals to self-select out of the program. These potential benefits of in-kind transfers are weighed against the fact that cash transfers typically have lower administrative costs and give recipients greater freedom over their consumption.

In a study in rural Mexico researchers at the Federal Reserve Bank of New York find:

– Villages that received boxes of food experienced a 4 percent decline in prices, while villages that received cash experienced a very slight increase in prices.
– Prices of nonfood goods were affected in both types of villages, but by very small amounts.
– In most cases, household purchasing power was only modestly effected, even when transfers were large and the eligibility was high.
– Purchasing power was dramatically changed in remote villages because these villages were shielded from the outside economy.
– Agricultural profits increased in cash villages to a greater degree than in kind villages. This suggests that cash transfers tend to help the suppliers more than consumers.

There are many reasons to choose between in kind or cash transfers, some of which include paternalistic objectives or maximizing choices. The research suggests that the choice should also involve considering the distributional and price effects.

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