Welfare Effects of an In-kind Transfer Program: Evidence from Mexico

Abstract

This paper shows how a theory-consistent demand system can be used to quantify recipient welfare under in-kind and cash transfers. Since welfare under an in-kind subsidy depends on the extent to which the transfer is extra-marginal, I compute the shadow prices at which a recipient would be as well off as with the in-kind transfer. Shadow prices are then used to compute the distribution of the willingness to pay for in-kind benefits among beneficiaries. As an application of this approach, I study the welfare effects of a governmental program which randomly transferred either a food basket or cash to poor households in rural Mexico. Results suggest that on average a recipient values the in-kind transfer at 80 percent of its face value. Despite the welfare loss, the in-kind transfer is more cost-efficient than cash. This is due to the fact that the food basket was significantly more expensive at the retail level than at the procurement level, which implies that a cash transfer of the same cost to the government could only buy a fraction of the food basket in recipient’s local markets. Because the food basket is mainly formed of normal goods, I also find that the willingness to pay is larger among recipients at the top of the income distribution, suggesting a regressive effect of the in-kind transfer.