In-kind transfers and home production
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In-kind transfers and home production 1
Matthew Greenblatt
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Received: 8 February 2020 / Accepted: 7 September 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Why are in-kind transfers a prominent feature of the U.S. social safety net, and why is such a significant fraction of these benefits given to individuals who do not actively supply labor in the market? This paper presents home production as a novel rationalization for such transfers. It first shows that in a broad class of dynamic Mirrleesian models that include only market production, the optimal allocation features undistorted marginal rates of substitution between goods whenever agents are not working, and thus in-kind benefits provided to these agents do not help decentralize an optimal allocation. However, adding home production drastically changes the nature of the optimal allocation. In particular, if goods and labor are substitutes in home production and home and market productivity are positively correlated, in-kind benefits in the form of goods used in home production, such as groceries, energy, and housing capital, should be provided to agents who do not work. A numerical simulation shows that the optimal in-kind program for disabled workers in a plausibly calibrated version of the home production model is consistent with the scale of SNAP and other programs that provide home production goods in the U.S. Keywords Home production In-kind transfers Optimal taxationg Food stamps ●
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JEL Codes D13 H21 H42 ●
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1 Introduction Government provision of private goods is a prominent feature of welfare programs throughout the developed world. In the U.S., for instance, in 2015, federal government spending on Medicare, Medicaid, SNAP (Food Stamps), and primary and secondary education constituted 10.5% of GDP according to the United States House of Representatives Ways and Means Committee Green Book. Despite their
* Matthew Greenblatt [email protected] 1
The College of New Jersey, Ewing, NJ, USA
M. Greenblatt
prevalence, there has long been skepticism about the value of such in-kind benefits. After all, giving recipients the cash value of the benefits would not restrict their behavior, leading to at least a weak improvement in their welfare. In response, economists have offered three broad classes of arguments made in favor of in-kind benefits. The first, which follows Loury (1981) and focuses on public provision of education,1 argues that in-kind provision of education can be an efficient response to market incompleteness caused by borrowing constraints faced by parents in financing human capital investment for their children. Public education programs can correct inefficiently low levels of educational investment by low income parents and social moblity created by these borrowing constraints. Another, following Musgrave (1959) and many others, contends that in-kind provision is a tool of paternalism. By restricting the behavior of welfare recipients with in-kind benefits, governments are able to effectively
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