Consumption and Poverty: How Effective are In-Kind Transfers? Author(s): Daniel T.

Slesnick Reviewed work(s): Source: The Economic Journal, Vol. 106, No. 439 (Nov., 1996), pp. 1527-1545 Published by: Blackwell Publishing for the Royal Economic Society Stable URL: http://www.jstor.org/stable/2235199 . Accessed: 03/04/2012 08:10
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( Royal Economic Society I996. Published by Blackwell TheEconomic Journal,Io6 (November), I527-I545. Publishers, io8 Cowley Road, Oxford OX4 iJF, UK and 238 Main Street, Cambridge, MA 02142, USA.

AND POVERTY: HOW EFFECTIVE CONSUMPTION ARE IN-KIND TRANSFERS?*

Daniel T. Slesnick
The ability of in-kind transfers to alleviate poverty depends on accurate targeting as well as Expenditure Surveys, efficiency the recipients' valuations of the benefits. Using data from the Consumer of in-kind transfersis examined in a microsimulation framework in which recipients are identified as those who have the lowest consumption. In this framework, in-kind transfers of food, capital services (which includes housing) and consumer services, are an effective means of providing support to the poor even at high levels of subsidisation. The multiple good transfers that are considered are essentially equivalent to cash grants.

The dramatic growth of transfersto the poor is evidence that, since the I96os, poverty alleviation has been a centrepiece of social policy in the United States. Sawhill (I988) reports that total means-tested benefits increased, in constant I986 dollars, from $i6 billion in I960 to $ioo billion in I984.1 In spite of this effort, there has been little net change in the official poverty rate over the last twenty-five years. This has led some analysts to classify the War on Poverty as an abject failure. A more careful assessment of the data suggests that this conclusion may be unwarranted. A bias in the poverty statistics arises from the fact that the Bureau of the Census tabulates the official poverty rate using household income rather than consumption as the basis for welfare measurement. Consumptionbased estimates indicate lower levels of poverty and greater progress in reducing poverty over the same period.2 In addition, the Census calculates the poverty rate using an income measure that does not include in-kind benefits. The effects of the very programmes which grew the fastest are therefore not included in the evaluation of the effectivenessof the government's anti-poverty programme.3 An accurate assessment of the impact of in-kind transfers on poverty is a formidable task due to problems of data availability. Under ideal circumstances, one would estimate the 'recipient value' of the benefits and determine their impact on a consumption-based measure of poverty. This requires expenditure data as well as information on the transfersreceived by a representative sample of the population. Such data do not exist in the United States. The alternative practice of measuring the impact of in-kind benefits on household welfare (and the poverty rate) by adding their consumption value to income is unsatisfactory for a number of reasons.4
* I have benefited greatly from comments on an earlier draft of this paper by Doug Dacy, DaleJorgenson, and two anonymous referees. I, alone, am responsible for any remaining errors. 1 See Sawhill (I988), table 4, p. I 098. 2 See, for example, Slesnick (I993). Sawhill (I988) reports that expenditures on in-kind transfersrose from only $3 billion in I960 to $70 billion in I984 in constant I986 dollars. The 4 This approach to assessing the effectiveness of in-kind benefits was developed by Smeeding (I982). Bureau of the Census supplements the official poverty statistics with estimates based on an income measure that includes the market values of in-kind transfers.

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Income is an inappropriate foundation for the identification of the poor since well-being is derived from the consumption of goods and services.5Arguments founded on the permanent income hypothesis suggest that welfare measures based on income are likely to be different from those calculated using consumption, even for the poor. Further, estimates of household's valuations of in-kind benefits are not possible without consumption data since they depend on tastes and expenditure patterns. As important, there is no reasonable justification for adding these transfers to income to obtain a measure of household welfare. To do so mixes apples (income) with oranges (consumption) and likely distorts the estimate of well-being. As an alternative, I use a microsimulation approach in which consumption data from the Consumer Surveys (CEX) are used to assess the Expenditure efficiency of in-kind benefits provided to individuals classified as poor based on their consumption levels. This measures the effects of the transfersin the ideal circumstance in which they are targeted to the most needy. As critical, the subsidies are evaluated using a behavioural model that is internally consistent in which the consumption value of the in-kind benefits are added to a consumption-based estimate of welfare. In the United States, food, housing and health care subsidies are major components of the anti-poverty programme. Are they effective in providing support to the poor? How does the efficiency of in-kind transfers (relative to equivalent cash grants) vary across commodities and over time? What is the effect of varying benefit levels on the poverty rate? In general, I find the inefficiency of in-kind benefits to be quite modest for some goods even at high levels of subsidisation. For these goods, in-kind transfersare an effective means of reducing poverty and increasing the standard of living for those at the lower end of the distribution.
I. PRELIMINARIES

A consumption-based poverty measure is calculated using an absolute standard in which the poor are identified as those who fail to attain a minimal standard of living.6 Household welfare is represented by an indirect utility function that depends on the vector of prices p, total expenditure Mk and a vector of household attributes Ak. If WJ is the 'subsistence' welfare level, then all members of a household are classified as poor if W(p,Mk,Ak) < W1. The specific parameterisation of the welfare function is: W(p, Mk,Ak) = lnpa +n 2npB Inp-D(p)In[Mk/mO(p, Ak)],
(I)

where D (p) = i- + t'Bppln p, m0(p, Ak) is a household equivalence scale and Mpand Bpp are unknown parameters. Aside from being consumption-based, the welfare function (i) incorporates household-specific price effects and accounts for the varying 'needs' of
5 This is true for a static welfare measure. While consumption is itself a noisy estimate of lifetime income, it is likely to be more accurate than current income. 6 Comprehensive reviews of alternative approaches to the measurement of poverty are presented by Foster (i 984) and Ravallion (I 993). ( Royal Economic Society I996

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households through the equivalence scales. Following Muellbauer (I974), the scales are defined to be the cost, relative to a reference household, of attaining a specific indifference contour: mO(p,Ak)
=

Ar)' M(p, Wk,

where M(.) is the expenditure function and Ar is the vector of characteristics of the reference household. This measure of needs is based on the spending patterns of households in contrast with the equivalence scales used to tabulate the official poverty rate which are based on households' nutritional requirements.' The expenditure function corresponding to
(i)

is parameterised as:

lnM(p, Wk, Ak)

D(p)

In p +'In pB

In p-Wk) +ln mO (p,Ak),

where the equivalence scale is of the form:8 ln mO Ak) (p,

=

D(P) [ln m (Ak)'ap

+2lnm(Ak)'BPP

ln m(Ak) +lnm(Ak) 'BPPlnp],

lnm(Ak) = BPBA Ak, and BPA is a matrix of unknown parameters. The identification of the poor is completed by choosing a threshold level of welfare W,4To facilitate comparisons of my results with the official statistics, I etnploy a poverty line that is consistent with the threshold used by the Census. This corresponds to the welfare level, calculated using (i), of a nonfarm family of four, with two school age children and total expenditure equal to $2,963 in To analyse in-kind benefits and poverty, the CEX published by the Bureau of Labour Statistics is used. These data are representative national samples that are conducted for the purpose of computing the weights in the Consumer Price Index. The surveys were administered approximately every ten years until at which time they were given annually. The sample includes data for I980 O 1980, I98I and I984 to I99I. I972, I973, I96I, The population coverage changed slightly over the years but can generally be described as the civilian non-institutionalised population. In the I96I, I972
7 Arguments against using demand data to estimate equivalence scales for welfare comparisons (of the type required to measure poverty) have been presented by Pollak and Wales (I979) among others. A survey of the empirical equivalence scale literature is presented by Browning (I992). to estimate household 8 This form of the expenditure function was used byJorgenson and Slesnick (I987) equivalence scales. The equivalence scales are of the Barten (i 964) form and are independent of the reference welfare level. They therefore satisfy the property of 'equivalence scale exactness' defined by Blackorby and Donaldson (I988 a) and Lewbel (I989). 9 This is the expenditure needed for a family of four to purchase the i964 Economy Food Plan. See Slesnick (I 993) for further discussion of the relation of this poverty line to the threshold used by the Census. The I982 and I983 surveys 10 A more detailed description of the CEX is presented by Slesnick (I992). covered only the urban population and are not used.

I 964.9

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and I973 surveys the annual expenditures for each household are reported. Beginning in I980 the surveys changed to a rotating panel format in which each household is in the sample for five quarters and expenditures are reported on a quarterly basis. I use observations in the second quarter of each year and the quarterly expenditures are multiplied by four to obtain total expenditure on an annual basis. The sample size in I 96 I is approximately I 3,000 households, in I972 and I973 the sample sizes are around 9,500 and in the the samples range between 4,ooo and 6,ooo households. I980s In general, the out-of-pocket expenditures of the household are reported in the CEX. Major in-kind transfers such as employer provided insurance, Medicaid, Medicare and government housing subsidies are not reported although some information on food stamps is included. I exclude gifts and cash contributions to persons and organisations outside the household as well as contributions to pensions, retirement funds and Social Security. For individuals who own their home, outlays on principal, interest, taxes and insurance are replaced with the reported rental equivalences which are found in all but three of the surveys. Expenditures on durable goods are replaced with estimated service flows from the stock of consumer durables."1 In addition to expenditure data from the CEX, the calculation of the consumption-based measure of welfare (i) requires commodity prices p, the vector of household attributes Ak and estimates of the unknown parameters. The prices used are the implicit price deflators of personal consumption expenditures in the National Income and Product Accounts. The demographic characteristics included are family size, the age of the head of the household, the region of residence, the gender of the head of the household, farm versus non-farm residence and the gender of the head of the household. The unknown parameters Mp, BPP and BPA are estimated using an econometric model developed by Jorgenson et al. (I982) in which Roy's Identity is applied to the indirect uFtilityfunction (i). The resulting demand equations are fit to time series and cross section data.12

II. CONSUMPTION-BASED

POVERTY

The ability of in-kind transfers to alleviate poverty depends on accurate targeting. Since households with the lowest consumption typically need the benefits the most, the welfare effect is estimated for transfers provided to those classified as poor based on their consumption levels. The proportion of the population belonging to households with welfare less than WJis tabulated using the CEX and is presented in Fig. i.13 The poverty rate falls from OI95 in I96I
Rental equivalences of owner occupied housing are estimated using hedonic regressionsfor I96I, I980 The computation of the service flows from durable goods is described by Slesnick (I992). 12 The demand system is a PIGLOG model based on stationary preferences that aggregates exactly to facilitate the integration of time series (NIPA) and cross section data. The details of the implementation are described by Jorgenson and Slesnick (I987). 13 The head count ratio is justifiably criticised as a measure of poverty. We report it only to preserve comparability with the poverty statistics reported by the Census.
11

and

I98I.

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CONSUMPTION . ,

AND .

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I53I

0-2

0-15

0.1

0 05

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1965

1970

1975 Year

1980

1985

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Fig.

i.

Aggregate poverty.

, Consumption-based poverty.

in I973, increases between I973 and I980 and attains a minimum of in I990. As reported elsewhere (Slesnick, I993), these estimates are substantially lower than the income-based poverty rates reported by the Census and indicate greater reduction in poverty over the thirty year period."4 Although the proportion of persons below the poverty line has been decreasing, what can be said about the well-being of the poor relative to the rest of the population? Has the intensity of poverty diminished and the welfare of the poor increased? To answer this question an index is computed that can be interpreted as the average level of per equivalent consumption: to
0-097 0-079
KL

WL
PL(p, pr

E Mk k=1
KL

)W) E mO(pr, Ak)

k=1

where KLis the number of households below the poverty line, PLis a price index specific to the poor, and pr is a vector of reference prices. The average level of per equivalent consumption for the poor and the nonpoor is presented in Fig. 2. For those above the poverty line, per equivalent consumption increases by 24-9 % between I 96 I and I 99 I. Roughly half of the
14 Note, however, that the level and trend of the poverty rate is sensitive to the choice of equivalence scales (Slesnick, I 993). A similar finding for the United Kingdom is reported by Coulter et al. (I992). 15 Note that the CEX shows substantially less growth in consumption relative to personal consumption expenditures in the national accounts. See Slesnick (I992).

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2500

2000

4.
1500
0

1000

500

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1970

1975 Year

1980

1985

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Fig.

2.

Consumption

to needs ratio.

, Non-poor population;

Poverty threshold; - - -,

Poverty population.

increase occurs between

I 985.15

196I

and

I973

and the remainder between

I973

and

There has been little net change in the average welfare of the non-poor since I985. Per equivalent consumption for the poor exhibits similar growth between I96I and I973 but changes little thereafter. The index increases (in constant I973 dollars) from $534 in I96I to $6oi in I973 and attains a level of $628 in I99I. This compares with a consumption to needs ratio of $838 at the poverty line which implies that the average 'intensity' of poverty has not changed substantially since I973. The efficiency of in-kind transfers depends on the expenditure patterns of the recipients and the degree of over-consumption induced by the subsidies. To get an idea as to how the poor are allocating resources across goods and services, the average expenditure shares are tabulated from the CEX for five broad categories of consumption: i. Energy - expenditures on electricity, natural gas, heating oil and gasoline. 2. Food - expenditures on all food products, including tobacco and alcohol. 3. Consumer Goods - expenditures on all other non-durable goods included in consumer expenditures. 4. Capital Services - the service flow from consumer durables and the service flow from housing. 5. Consumer Services - expenditures on consumer services, such as car repairs, travel, medical care, entertainment and so on. The proportion of spending devoted to food has played a prominent role in public policy debates due to the importance of the Food Stamp and School
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0-5-

04

003

";.,;. ;

-----X,--

............... .................... 0.1

.. ........ .......... ...... .

1960

1965

1970

1975 Year

1980

1985

1990

Food; ------- Consumer goods; Fig. 3. Consumption patterns of the poor. , Energy; Capital services; - - - Consumer services.

Lunch programmes in providing benefits to the poor."6 Fig. 3 shows that the food share is relatively high for the poor and fluctuated around a level of thirty percent between I96I and I99I. The share of capital services, which includes housing, is equally important accounting for 2 7 0 of total spending in I96I and 35 % in I99I. Food and capital services together account for two-thirds of total spending by the poor in I99I. Between I96I and I980, the poor devoted an increasing fraction of their budgets to energy goods which include utilities such as natural gas and electricity. The average share rose from 9 0 to over I 7 %0 after the second oil

price shock in

I980

and subsequently decreased to I 3 0 by

I99I.

Consumer

goods, which consist primarily of clothing, fell from I6 % of total expenditure in I96I to 5 0 in I99I. Consumer services ranged from between 2 I % and I500 of the budget over the thirty year period. How do the consumption patterns of the poor compare with the rest of the population? Fig. 4 shows that the nonpoor devote the largest fraction of their spending to capital services and the share exceeds the average for the poor in every year. Food and energy account for smaller fractions of total expenditure relative to the poor while the share of consumer services is markedly higher. Note that the proportion of spending on consumer services by the nonpoor exceeds that of food in all but two years.
16 It is also due to the fact that the food share for the poor is an important component to the Census' poverty definition. Orshansky (I965) assumed that the poor devote one-third of their expenditures to food and defined the poverty line to be the cost of a subsistence diet multiplied by three.

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0 .....2~~~~~~~~~~~~~~~~~~~~~ 40. .... . .. .

0-4-

~03

4.03
. . .= --- ---------

---

-- --

--

-.
-----

---

? -.

0-2

0.1

1960

1965

1970

1975 Year

1980

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Food; ----, Energy; Fig. 4. Consumption patterns of the non-poor. ; Capital services; -----, Consumer services.

Consumer goods;

III.

THE DEADWEIGHT

LOSS OF IN-KIND

TRANSFERS

The structure of transfer programmes in the United States reveals a philosophical schism among policy-makers as to the appropriate means of measuring and alleviating poverty. While poverty measurement and transfer eligibility requirements are formulated using a 'general egalitarian' framework based on the overall level of well-being, in-kind benefits address the needs of households on a 'specific egalitarian' or commodity-specific basis."7 The Food Stamp programme ensures that the nutritional needs of households are met. Rent subsidies and public housing programmes are designed to provide adequate shelter for those who meet stringent income and asset eligibility requirements. The Medicaid programme provides health care services to the indigent poor. For one who subscribes to the general egalitarian view, these programmes are perceived to be inefficient and inherently paternalistic since the poor cannot be made worse off by receiving the transfers in cash rather than in-kind. While the inefficiency of in-kind benefits is not in dispute, other arguments which support their use have recently emerged. Kelman (i 986) argues that inkind transfers directly address the basic rights of human beings. Medicaid and Medicare ensure the fundamental right to life while housing and food subsidies provide an individual's right to a minimal standard of living. Nichols and Zeckhauser (i982), Blinder and Rosen (I985) and Blackorby and Donaldson (i 988 b) present a case for transfers in-kind by distinguishing between 'transfer'
17

This terminology originated with Tobin

(I970).

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and 'target' efficiency. Their argument is that, while in-kind benefits are inefficient relative to cash, they could more accurately target the needy since the costs of masquerading as a poor person increases when the transfer is provided in-kind. Transfer inefficiency must therefore be weighed against the more precise targeting of benefits. Simulations by Blinder and Rosen (I985) indicate that the gains in target efficiency can be quite large. Therefore, it is important to assess the deadweight losses that result from transfers in-kind."8 If the inefficiency turns out to be small, the gains in target efficiency may outweigh the losses and provide support for the current structure of the anti-poverty programme. In this Section, I measure the deadweight losses that accrue from the provision of in-kind benefits to the poor. To distinguish between transfer inefficiency and inaccurate targeting, recipients are assumed to be those classified as poor based on the consumption criterion described in Section I. I initially assume that every poor household k receives a free voucher, with nominal value Bnk) to consume commodity n. The consumption value of this transfer depends on the household's tastes and expenditure patterns. If, after the transfer, the quantity consumed of the good exceeds the amount of the voucher, the in-kind benefit has the same effect on welfare as a cash grant. Otherwise, the welfare is that attained in a rationed equilibrium in which the consumer receives Bnk dollars but is restricted to consume Xr = Bnk/Pn units of the good. Formally, welfare of the kth household receiving a voucher for commodity n of Bnk dollars is
WI = W(p, Mk+Bnk,
-

Ak)

ifPn

Xnk

(p, Mk+Bnk,

Ak) > Bnk

MW(p*%Mk )Ak)

otherwise,

where p* is the vector of virtual prices and M* is virtual expenditure for the kth recipient. The virtual prices and expenditures are those which support the constrained consumption levels induced by the in-kind transfers. Applying Roy's Identity to the indirect utility function (i), the virtual price Pn*k which supports the voucher Bnk is defined implicitly by:
* tnk nk nr = X E i*n R3pn Inpi (9pjp +Ap lvnpnInnk ( ipnp ji

InM* +

# ,ni

A'
2

l
i*n itn j

npi
i

____

+ +/?nn

I-v

where Mk*

Mk +Pn*k Xnk iS

the level-ofvirtualexpenditure."9

The deadweight loss of the transfer is the monetary value of the welfare gain that would result from receiving the benefits in cash rather than in-kind. For
18 There have been a number of studies which have examined specific in-kind transferprogrammes. For example Murray (I 975), Olsen and Barton (I983) and Schwab (I985) analyse housing programmes while Fraker and Moffitt (I988) and Moffitt (I989) consider the food stamp programme. Murray (1994) and Smeeding (I982) examine the efficiency of multiple in-kind transfer programmes using (different) income data supplemented by receipts of in-kind benefits. Manser (i 987) repeats the exercise using a comprehensive and internally consistent model of consumer behaviour using household consumption data. 19 Neary and Roberts (I980) have shown that the virtual prices of the unrationed commodities are the market prices.

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the nth commodity, the post-transfer welfare level that results from the receipt of cash is WC = W(p, Mk+ Bfk, Ak). The deadweight loss of the voucher, evaluated at prices p, for the kth recipient is:

D WL (p Mk,Bk,Ak)

= M(p, W',

Ak) -

M(p, W Ak)

This measure of efficiency loss is nonnegative and equal to zero when the voucher is equivalent to cash. Note that measurement of the deadweight loss requires knowledge of recipients' expenditure patterns and, therefore, comprehensive consumption data. Instead of presenting the excess burden for individual households, I report the average over all recipients. For in-kind transfers of the nth commodity, the average loss per dollar transferred is :
KL

D WLn(p, Mk, Bnk, Ak)

KL E Bnk

AD WL

k (3k)

k=1

Perhaps more relevant to policy analysis is the change in deadweight loss that results when the amount of the voucher changes differentially. The average marginal deadweight loss for the nth good is defined as:
KL

i
k=l1

DWLn(p, Mk,Bnk) Ak)

L* 4

MD WLn=
-

A( E Bnk)

~~~~~k=1

The average and marginal deadweight losses are evaluated at varying levels of subsidisation when commodity vouchers are provided to every poor household. The amount transferred is proportional to household size so that, for example, a family of four receives a voucher that is four times as large as that received by a single individual. The virtual prices and expenditure, defined implicitly in equation (2), are calculated numerically using the Gauss-Seidel algorithm to solve for p*nk The average deadweight losses resulting from in-kind transfers of energy, food, consumer goods, capital services and consumer services to the poor in I 990 are presented in Fig. 5. Since the inefficiency arises from over-consumption of the commodity provided, one would expect the average and marginal deadweight losses to increase with the transfer levels and this is what is observed. On average, the highest loss occurs with energy and consumer goods while consumer services, capital services and food are more efficient. The average deadweight losses for food are small even for high levels of subsidisation attaining a level of o0io when transfers are $2,500 per capita. This contrasts with energy and consumer goods where the losses are 0o54 and o036 respectively.
20 The average deadweight loss should be interpreted only as a parsimonious description of the results for individuals. Since it is influenced by the distribution of welfare, it does not represent a 'pure' measure of aggregate efficiency. For further discussion of this issue, see Blackorby and Donaldson (1 99O) and Slesnick (I99I).

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07 0-6
z
0

05

2 04
C)

0-3 02

500

1,000 1,500 Transfers capita per

2,000

2,500

Fig. 5. Average deadweight loss- I990. , Energy; Consumer services; , Capital services; -.-.-,

Food; ------- Consumer goods;

,Food and capital.

In the United States many households receive in-kind benefits for more than one good. Do multiple-good transfers change the qualitative features of these results? The average deadweight losses incurred when poor households receive vouchers of equal nominal value for both food and capital services are shown in Fig. 5. The deadweight loss is defined in exactly the same way except that the virtual prices and expenditures are calculated under the assumption that there is, potentially, rationing of two goods.2" Fig. 5 shows that for all transfer levels, in-kind benefits of both food and capital services yield deadweight losses that are lower than for every good considered separately. Indeed, the average deadweight losses associated with vouchers for these two goods are virtually zero implying equivalence to cash grants. If only small changes in benefit levels are politically feasible, the marginal deadweight losses of in-kind transfers are more relevant. Fig. 6 shows that the marginal losses are substantially higher than the averages for each good and at every level of subsidisation. However, the relative levels across the five goods are the same with energy and consumer goods yielding the highest losses and the food the lowest. When both food and capital are subsidised, the marginal deadweight loss is low (o0o3 at the highest transfer level) and remains substantially below each good considered separately. How has the relative efficiency of in-kind transfers changed over the last thirty years? Figs. 7 and 8 show the average and marginal deadweight losses
21 While analytically identical, evaluating the welfare effect of two vouchers is computationally more complicated. There are four possibilities that need to be considered. The vouchers could yield unrationed demands of all goods implying equivalence to cash transfers.Alternatively, capital services could be rationed and food unrationed or vice versa. Lastly, the vouchers could result in rationed consumption of both goods.

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0-8

06

04

02

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0v 0

,.

.-

..

..

500

1 9000 1 9500 Transfersper capita

21000

2,500

Fig. 6. Marginal deadweight loss 190 , Energy; , Capital services; - ---, Consumer services;

Food;------,
,

Consumer goods;

Food and capital.

0-7 0-6
rA

0*5
04-

0-3 08) Roa Ecnoi

Soit

I996

0*2

?1I

X.

--

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1965

1970

1975 Year

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Fig.

-7.

Average deadweight loss. Capital services; -

~, Energy;
,Consumer

-,

Food;x-

services;

Consumer goods; odadcptl

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0-8-

0-601 .

..... ... . ..........

.. ....

0-4-

.,-.----

......--------

.......

o1960 1965

. _

I.

'.

1970

1975 Year

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1985

1990 Consumer goods;

Fig. 8. Marginal deadweight loss. , Energy; ----, , Capital services; --- -, Consumer services;

Food; ------,

Foodand capital.

associated with a constant real benefit level ($500 per capita in I973 dollars) for each good in each year. As in I990, the average losses are the highest for energy and consumer goods and are much lower for food, consumer services and capital services. In every year, the provision of both food and capital services is essentially equivalent to a cash grant. There is little change in the average and marginal deadweight losses over the three decades and only consumer services and capital services change their relative ranking. As in the marginal deadweight losses are larger than the averages in every i99o, year. The overall conclusion is that the inefficiencies associated with in-kind transfers vary with the level of subsidisation both on average as well as at the margin. However, vouchers for food, capital services and consumer services, yield modest losses on average with the marginal inefficiencies being somewhat higher. Transfers of food and capital services together have a welfare impact that is, for all practical purposes, the same as a cash grant. Given these relatively small losses, and the theoretical arguments which suggest that in-kind transfers are more likely to target the most needy individuals, we have support for the notion that in-kind subsidies are reasonable means for providing support to the poor. This general conclusion needs to be qualified because the relative costs of administering in-kind versus cash transfer programmes have not been considered. In addition, the deadweight losses are evaluated in a partial equilibrium setting in which household labour supply is assumed exogenously fixed. A complete assessment of the efficiency of in-kind transfer programmes
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should consider their impact on work incentives as well as the excess burden that results from raising revenue using distortionary taxation to pay for the transfers.22 Both of these effects could be large and overshadow the relatively small losses reported above.23 However, one would expect these inefficiencies to be of the same order of magnitude whether the transfers are provided in-kind or in cash. An additional concern is the robustness of the conclusions to the choice of who receives benefits. Recipients are those classified as poor which depends on the poverty line and how it is adjusted across households with different compositions. Since this is arbitrary, it is useful to examine how the estimates change when the benefits are provided to a different group of households. Let recipients be those classified as poor using the official equivalence scales used by the Census to estimate the national poverty rate. This not only changes the poverty rate but also influences the composition of the poor. I calculate the average deadweight losses that result from in-kind transfers of $500 per capita (in I973 dollars) to this new sample of recipients. While the deadweight loss estimates change, the general conclusions remain unaltered. In I990, the average deadweight losses from transfers of energy, food, consumer goods, capital services, consumer services, and food and capital services together are 0-45, 0-04, o026, o-o6, OI4 and oooi. The corresponding estimates from the original sample of recipients is 0-39, 002, 0-22, oo6, o io and o ooI.24
IV. IN-KIND TRANSFERS AND POVERTY ALLEVIATION

The inefficiency of in-kind transfers relative to cash is only part of an assessment of the effectiveness of these programmes since a key issue is their impact on the poverty rate. This depends not only on the deadweight loss of the benefits but also on the accuracy with which they are provided to the most needy. I examine three schemes for providing benefits to the poor which require successively more information on the part of the government. The first assumes that every poor household gets the same subsidy regardless of family composition or distance from the poverty line. The second scheme provides each recipient with a benefit that is proportional to household size while the last assumes that each household receives a transfer that is a fraction of its distance (in terms of the 'income' gap) from the poverty line. Under the assumption that every poor household receives the same subsidy, the post-transfer poverty rates at different levels of subsidisation are presented in Fig. 9 for I990. To distinguish between the effectiveness of in-kind transfers and the ability of this transfer scheme to target the benefits, the post-transfer poverty rate for an equivalent cash grant is also tabulated. For in-kind transfers
22 The effect of an in-kind subsidy, relative to cash grant, on labour supply is ambiguous. See Gahvari ('994). 23 General equilibrium estimates of the marginal deadweight loss of the tax system are quite large. Ballard et al. (i 985) estimate the marginal deadweight loss of the pre- I 986 tax system to be o 33 whileJorgenson and Yun (i99i) estimate it to be 0-46. 24 There is an additional issue of the sensitivity of the estimates to the demand functions used to measure the welfare effects. Both Schwab (I985) and De Borger (I989) find that the functional form influences the deadweight loss estimates in non-trivial ways.

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0-08 , 007 0-06

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005 g004,_ 0-03

0.02 0*0 0 500 1,000 1,500 Transfersper capita(currentdollars)

-

2,000

2,500

povertyrate (1990) Fig. 9. Post-transfer

,...., goods; Capital services;
-----,

Schemei.

Energy;

Food;------- Consumer
Food and capital;

Consumer services; ------, Cash. -A-,

and cash, there are decreasing returns to poverty reduction. Initially, there are sharp decreases in the poverty rate for in-kind transfers of each good as well as cash but the effect dirninishes as the transfers grow. Energy is the least effective means of reducing poverty, decreasing the poverty rate from 0o079 to 0-029 after providing vouchers of $2,500 per capita. Some of this ineffectiveness can be attributed to the redistribution mechanism since an equivalent cash grant reduces the poverty rate to only 0O0I 2. At all levels of subsidisation, in-kind transfers of both food and capital services are indistinguishable from cash in terms of their impact on the poverty rate. More surprising is the fact that inkind transfers of consumer services, capital services and food differ only slightly from cash in their ability to reduce poverty at all transfer levels. Fig. io depicts the post-transfer poverty rate when the benefits are linked to household size. The effect of energy vouchers is very similar to what was found in Fig. 9. However, vouchers for the other goods result in a poverty rate somewhat below what was found previously. Again, transfers of both food and capital services are equivalent to cash in terms of their impact on poverty alleviation and, with $2,500 per capita, results in a post-transfer poverty rate of O OO5. Food is only slightly less effective in reducing poverty while consumer services and capital services have a smaller but still substantial impact on the poverty rate at all levels of subsidisation. The last method provides benefits to the poor that are proportional to the distance from the poverty line and the impact on the poverty rate is shown in Fig. i i. The transfers initially have no effect on the poverty rate as they bring
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0*0 0 500 1,000 1,500 Transfers capita(currentdollars) per

-----,

2,000

2,500

Fig. IO. Post-transfer rate(i 990) poverty

,...., goods; Capital services;

, Energy; ----Consumer services; ------, Cash. -A-,

Scheme2.

Food;------- Consumer
Food and capital;

0 08, 007 006

&

.0-04

003 0-02 0*01

0
- - - - -r

500

1,000 1,500 Transfers capita(currentdollars) per

- Scheme 3 ---,Consumer ----, , Energy;

2,000

2,500

Fig. i i. Post-transfer rate poverty ( I990)

,...., goods; Capital services;
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the household closer to the poverty line without crossing it.25 However, once the transfer levels exceed the average 'income' gap, there are substantial reductions in the poverty rate. In fact, this method of providing benefits makes it possible to determine the relative cost of eliminating poverty using cash versus in-kind transfers. For example, the minimum cost of eliminating poverty using cash grants is $992 per capita. Equivalent levels of in-kind transfers results in poverty rates of o0o56 for energy, 0-020 for food, 0-043 for consumer goods, 0o030 for capital services, 0-035 for consumer services and o0oo3 for food and capital services combined. The cost of eliminating poverty using in-kind transfers of food and capital services is $I,09I per capita and $I,389 for food benefits alone. Has the ability of the in-kind benefits to reduce poverty changed substantially over time? To answer this question, I assume that transfers are proportional to household size (scheme 2) and that each household receives $500 per capita in constant I973 dollars. In general, larger proportionate reductions are found later in the sample period for cash and all in-kind transfers (Fig. I2).In I96I the pre-transfer poverty rate is OI95 while the post-transfer poverty rates (excluding energy) are clustered around o I00. Thirty years later the corresponding poverty rates are o-o85 and 0-020 respectively. Perhaps more relevant is the fact that, at this level of subsidisation, the impact on the poverty rate is similar for all goods except energy and is not very different from a cash grant.
0-2 0-18 0-16 0-14 0-12l l l

D 008 006 0-040-02-

1960 Fig.
------,
I 2.

1965

1970

1975 Year

1980

1985

1990

x -, , Energy; ----, Post-transfer poverty rate. Pre-transfer; Food; ,...., Consumer goods; Consumer services; ------Capital services; -----, Food and capital; -*-, Cash.

25 This is obviously the result of measuring poverty using the head count ratio. Other indexes that are sensitive to the intensity of poverty would decrease over this range of transfers.

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V. SUMMARY

In-kind benefits have grown in importance over the last thirty years as instruments of transfer policies in the United States. As a result, it is important to assess the efficiency losses that accompany this type of subsidy as well as their effectiveness in reducing poverty. It has long been recognised that this requires the calculation of the consumption value of the in-kind benefits. Less common is the recognition that this exercise also requires comprehensive consumption data describing the expenditure patterns of the recipients. In this paper, such data have been used to assess the efficiency of in-kind transfers relative to cash grants and their impact on the level of poverty. The ability of the programme to alleviate poverty depends both on the ability of the government to target the benefits as well as their effectiveness in raising the welfare of the recipients. Under the assumption of accurate targeting to the consumption poor, the average efficiency losses of in-kind benefits are quite low for some goods and certain multiple good transfers are nearly equivalent to cash grants in terms of their welfare effect. On the margin, however, the higher losses and both the average and marginal losses increase sharply, as expected, with the level of the transfer. Are in-kind benefits a good way to reduce poverty when targeted to the consumption poor? With the exception of energy and consumer goods, in-kind transfers have roughly the same impact on the poverty rate as cash. The limitations of these programmes seems to be the manner in which the benefits are distributed to recipients. For the three redistribution schemes considered, there is substantial variation in the degree of poverty alleviation at the different levels of subsidisation for both the in-kind transfers as well as the cash grants. Theoretical results have been presented which suggest that, because of imperfect information on the part of the government, in-kind transfers more accurately target those who need the benefits the most. The empirical results presented in this paper complement these findings. If in-kind benefits are provided to the consumption poor, the efficiency losses are quite small and their ability to reduce poverty is similar to equivalent cash grants. Contrary to popular opinion, in-kind transfers may well be an effective means of providing support to the poor. University of Texas Date of receiptoffinal typescript: February I996
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Blackorby, C. and Donaldson, D. (I990). 'A review article: the case against the use of the sum of Journalof Economics, 23, no. 3, August, vol. compensating variations in cost-benefit analysis.' Canadian pp. 47I-95. vol. 75, no. 4, September, pp. 736-47. Blinder, A. and Rosen, H. (I985). 'Notches.' American Economic Review, Literature, 30, vol. Browning, M. (I992). 'Children and household economic behavior.' Journalof Economic
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vol. 2, no. 2, April, pp. 55-73. and Kelman, S. (I986). 'A case for in-kind transfers.'Economics Philosophy, Lewbel, A. (I989). 'Household equivalence scales and welfare comparisons.' Journalof Public Economics, vol. 39,, no. 3, August, pp. 377-9I. Manser, M. (I987). 'Cash-equivalent values from in-kind benefits: estimates from a complete demand system using household data.' BLS Working Paper No. I 73, December. Moffitt, R. (I989). 'Estimating the value of an in-kind transfer: the case of food stamps.' Econometrica, vol. 57, no. 2, March, pp. 385-4I0. Muellbauer, J. (I 974). 'Household composition, Engel curves, and welfare comparisonsbetween households: a duality approach.' European Economic Review,vol. 5, pp. I03-22. vol. Murray, M. (I975). 'The distribution of benefits in public housing.' Econometrica, 43, pp. 77I-88. Inquiry,vol. 32, April, Murray, M. (I994). 'How inefficient are multiple in-kind transfers?' Economic
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Neary, J. P. and Roberts, K. W. (I980). 'The theory of household behavior under rationing.' European Economic Review,vol. I3, no. I, pp. 25-42. Nichols, A. and Zeckhauser, R. (I982). 'Targeting transfers through restrictions on recipients.' American Economic Review,vol. 72, no. 2, May, pp. 372-7. of Olsen, E. and Barton, D. (i 983). 'The benefits and costs of public housing in New York City.' Journal Public
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