Arbitrage and Corruption in Food Subsidy Programs: Evidence from India’s Public Distribution System

Abstract

Would the households get to buy more of subsidized grains from a food safety-net program if the difference between the price in the program and in the open market were to increase? This is an important question for safety-net programs anywhere in the world, but particularly so for the Public Distribution System (PDS) of grains in India. The standard economic intuition suggests that price controls distort signals and create incentives for unintended transactions. Dreze and Sen (2013), however, posit an opposite entitlement effect where an increase in arbitrage potential increases the value of PDS entitlement. Increase in the stake in the PDS for the eligible beneficiaries results in increased accountability and ultimately an increase in household purchase of grains from the PDS. We test these two competing hypotheses using the India Human Development Survey (IHDS) panel data and find evidence for both kinds of effects. In states where welfare programs are better governed, the Dreze and Sen (2013) conjecture holds, but in states like Bihar and Jharkhand where welfare programs are poorly run, the opposite pattern holds as households purchase of subsidized grains declines with increase in arbitrage. Acknowledgement : This paper was undertaken as a part of the CGIAR Research Program on Policies, Institutions, and Markets (PIM), led by IFPRI and benefited from financial support from the Technical Assistance and Research for Indian Nutrition and Agriculture (TARINA), joint initiative between IFPRI and Tata Cornell Initiative supported by Bill and Melinda Gates Foundation (BMGF). The opinions expressed here belong to the authors, and do not necessarily reflect those of PIM, IFPRI, CGIAR, or BMGF.