DP15844 In-Kind Transfers as Insurance

Author(s): Lucie Gadenne, Sam Norris, Monica Singhal, Sandip Sukhtankar
Publication Date: February 2021
Date Revised: February 2021
Keyword(s): cash transfers, in-kind transfers, India, price risk, Public Distribution System
JEL(s): H42, H53, I38, O12, Q18
Programme Areas: Public Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15844

Recent debates about the optimal form of social protection programs have highlighted the potential for cash as the preferred form of transfer to low income households. However, in-kind transfers remain prevalent throughout the world. We argue that beneficiaries themselves may prefer in-kind transfers because these transfers can provide insurance against price risk. Households in developing countries often face substantial price variation as a result of poorly integrated markets. We develop a model demonstrating that in-kind transfers are welfare improving relative to cash if the covariance between the marginal utility of income and price is positive. Using calorie shortfalls as a proxy for marginal utility, we find that in-kind transfers improve welfare relative to cash for Indian households, an effect driven entirely by poor households. We further show that expansions in the generosity of the Public Distribution System (PDS) - India's in-kind food transfer program - result not only in increased caloric intake but also reduced sensitivity of calories to prices.