Consumptiona Dn Poverty in Kind Transfers

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Consumption and Poverty: How Effective are In-Kind Transfers?

Author(s): Daniel T. SlesnickReviewed work(s):Source: The Economic Journal, Vol. 106, No. 439 (Nov., 1996), pp. 1527-1545Published by: Blackwell Publishing for the Royal Economic SocietyStable URL: http://www.jstor.org/stable/2235199 .

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The Economic ournal, o6 (November),527-I545. ( Royal Economic Society I996. Published by BlackwellPublishers, io8 Cowley Road, Oxford OX4 iJF, UK and 238 Main Street, Cambridge, MA 02142, USA.

CONSUMPTION AND POVERTY: HOW EFFECTIVEARE IN-KIND TRANSFERS?*Daniel T. Slesnick

The ability of in-kind transfers to alleviate poverty depends on accurate targeting as well asrecipients' valuations of the benefits. Using data from the Consumerxpenditureurveys,he efficiencyof in-kind transfers s examined in a microsimulation framework n which recipients are identifiedas those who have the lowest consumption. In this framework, in-kind transfersof food, capitalservices (which includes housing) and consumer services, are an effective means of providingsupport to the poor even at high levels of subsidisation. The multiple good transfers that areconsidered are essentially equivalent to cash grants.The dramatic growth of transfersto the poor is evidence that, since the I96os,poverty alleviation has been a centrepieceof social policy in the United States.Sawhill (I988) reports that total means-tested benefits increased, in constantI986 dollars, from $i6 billion in I960 to $ioo billion in I984.1 In spite of thiseffort, there has been little net change in the official poverty rate over the lasttwenty-five years. This has led some analysts to classify the War on Poverty asan abject failure.A more careful assessmentof the data suggests that this conclusion may beunwarranted. A bias in the poverty statistics arises from the fact that theBureauof the Censustabulatesthe official poverty rate using household incomerather than consumption as the basis for welfare measurement. Consumption-based estimates indicate lower levels of poverty and greater progress inreducing poverty over the same period.2In addition, the Census calculates thepoverty rate using an income measure that does not include in-kind benefits.The effects of the very programmes which grew the fastest are therefore notincluded in the evaluation of the effectivenessof the government'santi-povertyprogramme.3

An accurate assessment of the impact of in-kind transfers on poverty is aformidable task due to problems of data availability. Under ideal cir-cumstances, one would estimate the 'recipient value' of the benefits anddetermine their impact on a consumption-based measure of poverty. Thisrequires expenditure data as well as informationon the transfersreceived by arepresentative sample of the population. Such data do not exist in the UnitedStates. The alternative practice of measuringthe impact of in-kind benefits onhousehold welfare (and the poverty rate) by adding their consumption valueto income is unsatisfactoryfor a number of reasons.4* I have benefited greatlyfrom comments on an earlier draftof thispaper by Doug Dacy, DaleJorgenson,and two anonymous referees. I, alone, am responsiblefor 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 $70billion in I984 in constant I986 dollars.4 This approach to assessingthe effectivenessof in-kind benefits was developed by Smeeding (I982). TheBureau of the Census supplements the official poverty statistics with estimates based on an income measurethat includes the market values of in-kind transfers.

[ I527 I


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I528 THE ECONOMIC JOURNAL [NOVEMBERIncome is an inappropriate foundationfor the identification of the poor sincewell-being is derived from the consumption of goods and services.5Argumentsfounded on the permanent income hypothesis suggest that welfare measuresbased on income are likely to be different from those calculated using

consumption, even for the poor. Further, estimates of household's valuations ofin-kind benefits are not possible without consumption data since they dependon tastes and expenditure patterns. As important, there is no reasonablejustification for adding these transfers to income to obtain a measure ofhousehold welfare. To do so mixes apples (income) with oranges (consumption)and likely distorts the estimate of well-being.As an alternative, I use a microsimulationapproach in which consumptiondata from the Consumer xpenditure urveys (CEX) are used to assess theefficiencyof in-kind benefits provided to individuals classifiedas poor based ontheir consumption levels. This measures the effectsof the transfers n the idealcircumstance in which they are targeted to the most needy. As critical, thesubsidies are evaluated using a behavioural model that is internally consistentin which the consumption value of the in-kind benefits are added to aconsumption-based estimate of welfare.In the United States, food, housing and health care subsidies are majorcomponents of the anti-poverty programme. Are they effective in providingsupport to the poor? How does the efficiency of in-kind transfers(relative toequivalent cash grants) vary across commodities and over time? What is theeffect of varying benefit levels on the poverty rate? In general, I find theinefficiency of in-kind benefits to be quite modest for some goods even at highlevels of subsidisation. For these goods, in-kind transfersare an effective meansof reducing poverty and increasingthe standard of living for those at the lowerend of the distribution.

I. PRELIMINARIESA consumption-based poverty measure is calculated using an absolutestandardin which the poor are identified as those who fail to attain a minimal standardof living.6Household welfare is represented by an indirect utility function thatdepends on the vector of prices p, total expenditure Mk and a vector ofhousehold attributes Ak. If WJis the 'subsistence' welfare level, then allmembers of a household are classified as poor if W(p,Mk,Ak) < W1.Thespecific parameterisationof the welfare function is:

W(p, Mk,Ak) = lnpa +n npB Inp-D(p)In[Mk/mO(p, Ak)], (I)where D (p) = i- + t'Bpp n p, m0(p, Ak) is a household equivalence scale andMpand Bppare unknown parameters.Aside from being consumption-based, the welfare function (i) incorporateshousehold-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 Comprehensivereviews of alternative approaches to the measurementof poverty are presented by Foster

(i 984) and Ravallion (I 993)( Royal Economic Society I996


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I996] CONSUMPTION AND POVERTY I529households through the equivalence scales. Following Muellbauer (I974), thescales are defined to be the cost, relative to a reference household, of attaininga specific indifference contour:

mO(p,Ak) = M(p, Wk, r)'where M(.) is the expenditure function and Ar is the vector of characteristicsof the reference household. This measure of needs is based on the spendingpatterns of households in contrast with the equivalence scales used to tabulatethe official poverty rate which are based on households' nutritionalrequirements.'The expenditure function corresponding to (i) is parameterised as:

lnM(p, Wk, Ak) = D(p) In p +'In pB In p-Wk) +ln mOp,Ak),where the equivalence scale is of the form:8

ln mOp, Ak) = D(P) [ln m (Ak)'ap+2lnm(Ak)'BPP ln m(Ak) +lnm(Ak) 'BPP np],

lnm(Ak) = BPBA Ak, and BPAis a matrix of unknown parameters.The identification of the poor is completed by choosing a threshold level ofwelfare W,4To facilitate comparisons of my results with the official statistics, Ietnploy 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 familyof four, with two school age children and total expenditure equal to $2,963 inI964.9To analyse in-kind benefits and poverty, the CEX published by the Bureauof Labour Statistics is used. These data are representative national samples thatare conducted for the purpose of computing the weights in the Consumer PriceIndex. The surveys were administered approximately every ten years untilI980 at which time they were given annually. The sample includes data forI96I, I972, I973, 1980, I98I and I984 to I99I. OThe population coverage changed slightly over the years but can generallybe 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 thetype required to measure poverty) have been presented by Pollak and Wales (I979) among others.A surveyof the empirical equivalence scale literature is presented by Browning (I992).8 This form of the expenditure function was used byJorgenson and Slesnick (I987) to estimate householdequivalence scales.The equivalence scales are of the Barten (i 964) formand are independent of the referencewelfare level. They thereforesatisfy the property of 'equivalence scale exactness' defined by Blackorby andDonaldson (I988 a) and Lewbel (I989).9 This is the expenditure needed for a family of four to purchase the i964 Economy Food Plan. SeeSlesnick (I 993) for further discussionof the relation of this poverty line to the thresholdused by the Census.10 A more detailed description of the CEX is presented by Slesnick (I992). The I982 and I983 surveyscovered only the urban population and are not used.C Royal Economic Society I996


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I530 THE ECONOMIC JOURNAL [NOVEMBERand I973 surveys the annual expenditures for each household are reported.Beginning in I980 the surveys changed to a rotating panel format in whicheach household is in the sample for five quarters and expenditures are reportedon a quarterly basis. I use observations in the second quarter of each year andthe quarterly expenditures are multiplied by four to obtain total expenditureon an annual basis. The sample size in I96 I is approximately I 3,000households, in I972 and I973 the sample sizes are around 9,500 and in theI980s the samples range between 4,ooo and 6,ooo households.In general, the out-of-pocket expenditures of the household are reported inthe CEX. Major in-kind transfers such as employer provided insurance,Medicaid, Medicare and government housing subsidies are not reportedalthough some information on food stamps is included. I exclude gifts and cashcontributions to persons and organisations outside the household as well ascontributions to pensions, retirement funds and Social Security. For individualswho own their home, outlays on principal, interest, taxes and insurance arereplaced with the reported rental equivalences which are found in all but threeof the surveys. Expenditures on durable goods are replaced with estimatedservice flows from the stock of consumer durables."1In addition to expenditure data from the CEX, the calculation of theconsumption-based measure of welfare (i) requires commodity prices p, thevector of household attributes Ak and estimates of the unknown parameters.The prices used are the implicit price deflators of personal consumptionexpenditures in the National Income and Product Accounts. The demographiccharacteristics 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 versusnon-farm residence and the gender of the head of the household. The unknownparameters Mp, BPP and BPA are estimated using an econometric modeldeveloped by Jorgenson et al. (I982) in which Roy's Identity is applied to theindirect uFtilityfunction (i). The resulting demand equations are fit to timeseries and cross section data.12

II. CONSUMPTION-BASED POVERTYThe ability of in-kind transfers to alleviate poverty depends on accuratetargeting. Since households with the lowest consumption typically need thebenefits the most, the welfare effect is estimated for transfers provided to thoseclassified as poor based on their consumption levels. The proportion of thepopulation belonging to households with welfare less than WJs tabulated usingthe CEX and is presentedin Fig. i.13 The poverty rate falls from OI95 in I96I

11 Rental equivalences of owner occupied housing are estimated using hedonic regressions or I96I, I980and I98I. 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 tofacilitate the integration of time series (NIPA) and cross section data. The details of the implementation aredescribed by Jorgenson and Slesnick (I987).13 The head count ratio is justifiably criticised as a measure of poverty. We report it only to preservecomparability with the poverty statistics reported by the Census.

( Royal Economic Society I996


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1996] CONSUMPTION AND POVERTY I53I025 . , . , ,

0-2

0-15

0.1

0 05

1960 1965 1970 1975 1980 1985 1990Year

Fig. i. Aggregate poverty. , Consumption-based poverty.

to 0-097 in I973, increases between I973 and I980 and attains a minimum of0-079 in I990. As reported elsewhere (Slesnick, I993), these estimates aresubstantially lower than the income-based poverty rates reported by theCensus and indicate greater reduction in poverty over the thirty year period."4Although the proportion of persons below the poverty line has beendecreasing, what can be said about the well-being of the poor relative to the restof the population? Has the intensity of poverty diminished and the welfare ofthe poor increased? To answer this question an index is computed that can beinterpreted as the average level of per equivalent consumption:

KLE Mkk=1WL KL

PL(p, pr )W) E mO(pr, k)k=1where KL s the number of households below the poverty line, PL s a price indexspecific to the poor, and pr is a vector of reference prices.The average level of per equivalent consumption for the poor and the non-poor is presented in Fig. 2. For those above the poverty line, per equivalentconsumption 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, I993). 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 consumptionexpenditures in the national accounts. See Slesnick (I992).

C Royal Economic Society I996


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I532 THE ECONOMIC JOURNAL [NOVEMBER3000

r 2500

o 200004.

15000

S 1000

500

1960 1965 1970 1975 1980 1985 1990Year

Fig. 2. Consumption to needs ratio. , Non-poor population; Poverty threshold; - - -,Poverty population.

increase occurs between 196I and I973 and the remainder between I973 andI 985.15 There has been little net change in the average welfare of the non-poorsince I985. Per equivalent consumption for the poor exhibits similar growthbetween I96I and I973 but changes little thereafter. The index increases (inconstant 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 thepoverty line which implies that the average 'intensity' of poverty has notchanged substantially since I973.The efficiency of in-kind transfers depends on the expenditure patterns of therecipients and the degree of over-consumption induced by the subsidies. To getan idea as to how the poor are allocating resources across goods and services,the average expenditure shares are tabulated from the CEX for five broadcategories 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 includedin consumer expenditures.4. Capital Services - the service flow from consumer durables and theservice flow from housing.5. Consumer Services - expenditures on consumer services, such as carrepairs, travel, medical care, entertainment and so on.The proportion of spending devoted to food has played a prominent role inpublic policy debates due to the importance of the Food Stamp and School



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I996] CONSUMPTION AND POVERTY 1533

0-5-

04

003 ;;.,;. -----X,--

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

0.1

01960 1965 1970 1975 1980 1985 1990

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

Lunch programmes in providing benefits to the poor."6 Fig. 3 shows that thefood share is relatively high for the poor and fluctuated around a level of thirtypercent between I96I and I99I. The share of capital services, which includeshousing, is equally important accounting for 2 7 0 of total spending in I96I and35 % in I99I. Food and capital services together account for two-thirds of totalspending by the poor in I99I.Between I96I and I980, the poor devoted an increasing fraction of theirbudgets to energy goods which include utilities such as natural gas andelectricity. The average share rose from 9 0 to over I 7 %0after the second oilprice shock in I980 and subsequently decreased to I 3 0 by I99I. Consumergoods, which consist primarily of clothing, fell from I6 % of total expenditurein I96I to 5 0 in I99I. Consumerservicesrangedfrombetween 2 I % and I500of the budget over the thirty year period.How do the consumption patterns of the poor compare with the rest of thepopulation? Fig. 4 shows that the nonpoor devote the largest fraction of theirspending to capital services and the share exceeds the average for the poor inevery year. Food and energy account for smaller fractions of total expenditurerelative to the poor while the share of consumer services is markedly higher.Note that the proportion of spending on consumer services by the nonpoorexceeds 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 foodand defined the poverty line to be the cost of a subsistencediet multiplied by three.( Royal Economic Society I996


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I534 THE ECONOMIC JOURNAL [NOVEMBER0-6

0-50 0.. ~~~~~~~~~~~~~~~~~~~~~ .0-4-

4.03~03m . . .= --- ---- ----- -- -- -. - -.-- -- -- -- -- - ---- --- ?0-2

0.1

1960 1965 1970 1975 1980 1985 1990Year

Fig. 4. Consumptionpatterns of the non-poor. , Energy; Food; ----- Consumergoods;; Capital services; -----, Consumer services.

III. THE DEADWEIGHT LOSS OF IN-KIND TRANSFERSThe structure of transfer programmes in the United States reveals aphilosophical schism among policy-makers as to the appropriate means ofmeasuring and alleviating poverty. While poverty measurement and transfereligibility requirements are formulated using a 'general egalitarian' frameworkbased on the overall level of well-being, in-kind benefits address the needs ofhouseholds on a 'specific egalitarian' or commodity-specific basis."7The FoodStamp programme ensures that the nutritional needs of households are met.Rent subsidies and public housing programmes are designed to provideadequate shelter for those who meet stringent income and asset eligibilityrequirements. The Medicaid programme provides health care services to theindigent poor. For one who subscribes to the general egalitarian view, theseprogrammes are perceived to be inefficient and inherently paternalistic sincethe poor cannot be made worse off by receiving the transfers in cash rather thanin-kind.While the inefficiency of in-kind benefits is not in dispute, other argumentswhich support their use have recently emerged. Kelman (i 986) argues that in-kind transfers directly address the basic rights of human beings. Medicaid andMedicare ensure the fundamental right to life while housing and food subsidiesprovide an individual's right to a minimal standard of living. Nichols andZeckhauser (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).C Royal Economic Society I996


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I996] CONSUMPTION AND POVERTY I535and 'target' efficiency. Their argument is that, while in-kind benefits areinefficient relative to cash, they could more accurately target the needy sincethe costs of masquerading as a poor person increases when the transfer isprovided in-kind. Transfer inefficiency must therefore be weighed against themore 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 fromtransfers in-kind."8 If the inefficiency turns out to be small, the gains in targetefficiency may outweigh the losses and provide support for the current structureof the anti-poverty programme. In this Section, I measure the deadweight lossesthat accrue from the provision of in-kind benefits to the poor. To distinguishbetween transfer inefficiency and inaccurate targeting, recipients are assumedto be those classified as poor based on the consumption criterion described inSection I.I initially assume that every poor household k receives a free voucher, withnominal value Bnk) to consume commodity n. The consumption value of thistransfer depends on the household's tastes and expenditure patterns. If, afterthe transfer, the quantity consumed of the good exceeds the amount of thevoucher, 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 theconsumer receives Bnk dollars but is restricted to consume Xr = Bnk/Pn units ofthe good. Formally, welfare of the kth household receiving a voucher forcommodity n of Bnk dollars is

WI = W(p, Mk+Bnk, Ak) ifPn Xnk (p, Mk+Bnk, Ak) > Bnk-MW(p*%MkAk) otherwise,

where p* is the vector of virtual prices and M* is virtual expenditure for thekth recipient.The virtual prices and expenditures are those which support the constrainedconsumption levels induced by the in-kind transfers. Applying Roy's Identityto the indirect utility function (i), the virtual price Pn*k which supports thevoucher Bnk is defined implicitly by:

* Xnr E R3pn Inpi +Ap lvnpnInnk ( ipnp InM* + # ,ni A'tnk nk = i*n ji 2____ - I +

(9pjp l npi+/?nn itn I-vi*n j i

where Mk* = Mk +Pn*k Xnk iS the level-ofvirtualexpenditure."9The deadweight loss of the transfer is the monetary value of the welfare gainthat would result from receiving the benefits in cash rather than in-kind. For18 There have been a number of studies which have examined specific in-kind transferprogrammes. Forexample Murray (I 975), Olsen and Barton (I983) and Schwab (I985) analyse housing programmeswhileFraker and Moffitt (I988) and Moffitt (I989) consider the food stamp programme. Murray (1994) andSmeeding (I982) examine the efficiency of multiple in-kind transfer programmes using (different) incomedata supplemented by receiptsof in-kind benefits. Manser (i 987) repeats the exerciseusing a comprehensiveand 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 themarket prices.



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I536 THE ECONOMIC JOURNAL [NOVEMBERthe nth commodity, the post-transfer welfare level that results from the receiptof 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 thevoucher is equivalent to cash. Note that measurement of the deadweight lossrequires knowledge of recipients' expenditure patterns and, therefore,comprehensive consumption data.Instead of presenting the excess burden for individual households, I reportthe average over all recipients. For in-kind transfers of the nth commodity, theaverage loss per dollar transferred is :

KLi D WLn(p, Mk, Bnk,Ak)ADWL k KL3k)

E Bnkk=1Perhaps more relevant to policy analysis is the change in deadweight loss thatresults when the amount of the voucher changes differentially. The averagemarginal deadweight loss for the nth good is defined as:

- KLA i DWLn p, Mk,Bnk) Ak)MD WLn= k=l1 L* 4A( E Bnk)

- ~~~~~k=1The average and marginal deadweight losses are evaluated at varying levelsof subsidisation when commodity vouchers are provided to every poorhousehold. 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 thatreceived by a single individual. The virtual prices and expenditure, defined

implicitly in equation (2), are calculated numerically using the Gauss-Seidelalgorithm to solve for p*nkThe average deadweight losses resulting from in-kind transfers of energy,food, consumer goods, capital services and consumer services to the poor inI 990 are presented in Fig. 5. Since the inefficiency arises from over-consumptionof the commodity provided, one would expect the average and marginal dead-weight losses to increase with the transfer levels and this is what is observed. Onaverage, the highest loss occurs with energy and consumer goods whileconsumer services, capital services and food are more efficient. The averagedeadweight losses for food are small even for high levels of subsidisationattaining a level of o0io when transfers are $2,500 per capita. This contrastswith energy and consumer goods where the losses are 0o54 and o036respectively.

20 The average deadweight loss should be interpretedonly as a parsimoniousdescription of the resultsforindividuals. Since it is influenced by the distribution of welfare, it does not represent a 'pure' measure ofaggregate efficiency. For further discussion of this issue, see Blackorby and Donaldson (1 99O) and Slesnick(I99I).(C Royal Economic Society I996


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I996] CONSUMPTION AND POVERTY I537

07

0-6z 050

2 04C)

0-302

0 500 1,000 1,500 2,000 2,500Transfersper capita

Fig. 5. Average deadweight loss- I990. , Energy; Food; ------- Consumer goods;, Capital services; -.-.-, Consumer services; x ,Food and capital.

In the United States many households receive in-kind benefits for more thanone good. Do multiple-good transfers change the qualitative features of theseresults? The average deadweight losses incurred when poor households receivevouchers of equal nominal value for both food and capital services are shownin Fig. 5. The deadweight loss is defined in exactly the same way except thatthe virtual prices and expenditures are calculated under the assumption thatthere is, potentially, rationing of two goods.2" Fig. 5 shows that for all transferlevels, in-kind benefits of both food and capital services yield deadweight lossesthat are lower than for every good considered separately. Indeed, the averagedeadweight losses associated with vouchers for these two goods are virtuallyzero implying equivalence to cash grants.If only small changes in benefit levels are politically feasible, the marginaldeadweight losses of in-kind transfers are more relevant. Fig. 6 shows that themarginal losses are substantially higher than the averages for each good and atevery level of subsidisation. However, the relative levels across the five goodsare the same with energy and consumer goods yielding the highest losses andthe food the lowest. When both food and capital are subsidised, the marginaldeadweight loss is low (o0o3 at the highest transfer level) and remainssubstantially below each good considered separately.How has the relative efficiency of in-kind transfers changed over the lastthirty 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 morecomplicated. There are four possibilities that need to be considered. The vouchers could yield unrationeddemands of all goods implying equivalence to cash transfers.Alternatively, capital services could be rationedand food unrationed or vice versa. Lastly, the vouchers could result in rationed consumption of both goods.( Royal Economic Society I996


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I538 THE ECONOMIC JOURNAL [NOVEMBER1 I I I

0-8

08 ,. .- .. .. . -

0 06

04

02

0v0 500 1 9000 1 9500 21000 2,500Transfersper capita

Fig. 6. Marginal deadweight loss 190 , Energy; Food;------, Consumer goods;, Capital services;- ---, Consumer services; x , Food andcapital.

08)Roa Ecnoi Soit I996

0-7

0-6rA 0*5

04-

0-3

0*2

?1I X. , - - - N ?1960 1965 1970 1975 1980 1985 1990

YearFig. -7. Average deadweight loss. ~, Energy; -, Food;- Consumer goods;Capital services; ,Consumer services; x- odadcptl

? Royal Economic Society 1996


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I996] CONSUMPTION AND POVERTY I539

0-8-

0 0-6-

0-4-

01 . ..... ... .......... .. ....

.,-.---- -------- ............

o- I_ . '.1960 1965 1970 1975 1980 1985 1990

YearFig. 8. Marginal deadweight loss. , Energy; ----, Food; ------, Consumer goods;, Capital services; --- -, Consumer services; x , Food andcapital.

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 forenergy and consumer goods and are much lower for food, consumer servicesand capital services. In every year, the provision of both food and capitalservices is essentially equivalent to a cash grant. There is little change in theaverage and marginal deadweight losses over the three decades and onlyconsumer services and capital services change their relative ranking. As ini99o, the marginal deadweight losses are larger than the averages in everyyear.The overall conclusion is that the inefficiencies associated with in-kindtransfers vary with the level of subsidisation both on average as well as at themargin. However, vouchers for food, capital services and consumer services,yield modest losses on average with the marginal inefficiencies being somewhathigher. Transfers of food and capital services together have a welfare impactthat is, for all practical purposes, the same as a cash grant. Given theserelatively small losses, and the theoretical arguments which suggest that in-kindtransfers are more likely to target the most needy individuals, we have supportfor the notion that in-kind subsidies are reasonable means for providing supportto the poor.This general conclusion needs to be qualified because the relative costs ofadministering in-kind versus cash transfer programmes have not beenconsidered. In addition, the deadweight losses are evaluated in a partialequilibrium setting in which household labour supply is assumed exogenouslyfixed. A complete assessment of the efficiency of in-kind transfer programmes( Royal Economic Society I996


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I540 THE ECONOMIC JOURNAL [NOVEMBERshould consider their impact on work incentives as well as the excess burdenthat results from raising revenue using distortionary taxation to pay for thetransfers.22 Both of these effects could be large and overshadow the relativelysmall losses reported above.23 However, one would expect these inefficiencies tobe of the same order of magnitude whether the transfers are provided in-kindor in cash.An additional concern is the robustness of the conclusions to the choice ofwho receives benefits. Recipients are those classified as poor which depends onthe poverty line and how it is adjusted across households with differentcompositions. Since this is arbitrary, it is useful to examine how the estimateschange when the benefits are provided to a different group of households. Letrecipients be those classified as poor using the official equivalence scales usedby the Census to estimate the national poverty rate. This not only changesthe poverty rate but also influences the composition of the poor. I calculatethe average deadweight losses that result from in-kind transfers of $500 percapita (in I973 dollars) to this new sample of recipients. While the deadweightloss estimates change, the general conclusions remain unaltered. In I990, theaverage deadweight losses from transfers of energy, food, consumer goods,capital services, consumer services, and food and capital services together are0-45, 0-04, o026, o-o6, OI4 and oooi. The corresponding estimates from theoriginal sample of recipients is 0-39, 002, 0-22, oo6, o io and o ooI.24

IV. IN-KIND TRANSFERS AND POVERTY ALLEVIATIONThe inefficiency of in-kind transfers relative to cash is only part of an assessmentof the effectiveness of these programmes since a key issue is their impact on thepoverty rate. This depends not only on the deadweight loss of the benefits butalso on the accuracy with which they are provided to the most needy. Iexamine three schemes for providing benefits to the poor which requiresuccessively more information on the part of the government. The first assumesthat every poor household gets the same subsidy regardless of familycomposition or distance from the poverty line. The second scheme provideseach recipient with a benefit that is proportional to household size while the lastassumes 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 presentedin Fig. 9 for I990. To distinguish between the effectiveness of in-kind transfersand the ability of this transfer scheme to target the benefits, the post-transferpoverty 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 equilibriumestimatesof the marginal deadweight loss of the tax systemare quite large. Ballardet al. (i 985) estimate the marginal deadweight loss of the pre-I986 tax system to be o 33 whileJorgenson andYun (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 measurethe welfare effects. Both Schwab (I985) and De Borger (I989) find that the functional form influences thedeadweight loss estimates in non-trivial ways.( Royal Economic Society I996


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1996] CONSUMPTION AND POVERTY I54I0-08 ,007

0-06

005g004,_ _0-03

0.020*0

0 500 1,000 1,500 2,000 2,500Transferspercapita (currentdollars)

Fig. 9. Post-transferoverty ate 1990) - Scheme . , Energy; Food; ------ Consumergoods;...., Capital services; -----, Consumer services; ------, Food and capital;-A-, Cash.

and cash, there are decreasing returns to poverty reduction. Initially, there aresharp decreases in the poverty rate for in-kind transfers of each good as well ascash but the effect dirninishes as the transfers grow. Energy is the least effectivemeans of reducing poverty, decreasing the poverty rate from 0o079 to 0-029after providing vouchers of $2,500 per capita. Some of this ineffectiveness canbe attributed to the redistribution mechanism since an equivalent cash grantreduces the poverty rate to only 0O0I 2. At all levels of subsidisation, in-kindtransfers of both food and capital services are indistinguishable from cash interms of their impact on the poverty rate. More surprising is the fact that in-kind transfers of consumer services, capital services and food differ only slightlyfrom cash in their ability to reduce poverty at all transfer levels.Fig. io depicts the post-transfer poverty rate when the benefits are linked tohousehold size. The effect of energy vouchers is very similar to what was foundin Fig. 9. However, vouchers for the other goods result in a poverty ratesomewhat below what was found previously. Again, transfers of both food andcapital services are equivalent to cash in terms of their impact on povertyalleviation and, with $2,500 per capita, results in a post-transfer poverty rateof O OO5.Food is only slightly less effective in reducing poverty while consumerservices and capital services have a smaller but still substantial impact on thepoverty rate at all levels of subsidisation.The last method provides benefits to the poor that are proportional to thedistance from the poverty line and the impact on the poverty rate is shown inFig. i i. The transfers initially have no effect on the poverty rate as they bring( Royal Economic Society I996


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1542 THE ECONOMIC JOURNAL [NOVEMBER0 08 , - r007

0-06o005

8004003002 -

0*00 500 1,000 1,500 2,000 2,500Transfersper capita(currentdollars)

Fig. IO. Post-transferoverty ate(i 990) - Scheme . , Energy;---- Food; ------ Consumergoods;...., Capital services; -----, Consumer services; ------, Food and capital;-A-, Cash.

0 08, & % I007006

.0-04

0030-02

0*010 - - - - -r A A0 500 1,000 1,500 2,000 2,500Transferspercapita(currentdollars)

Fig. i. Post-transferoverty ate 990) - Scheme , Energy;---, Food; , Consumergoods;...., Capital services; ---,Consumer services; ------- Food and capital;-A, Cash.( Royal Economic Society I996


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I996] CONSUMPTION AND POVERTY I543the household closer to the poverty line without crossing it.25 However, oncethe transfer levels exceed the average 'income' gap, there are substantialreductions in the poverty rate. In fact, this method of providing benefits makesit possible to determine the relative cost of eliminating poverty using cashversus in-kind transfers. For example, the minimum cost of eliminating povertyusing cash grants is $992 per capita. Equivalent levels of in-kind transfersresults in poverty rates of o0o56 for energy, 0-020 for food, 0-043 for consumergoods, 0o030 for capital services, 0-035 for consumer services and o0oo3 for foodand capital services combined. The cost of eliminating poverty using in-kindtransfers of food and capital services is $I,09I per capita and $I,389 for foodbenefits alone.Has the ability of the in-kind benefits to reduce poverty changed substantiallyover time? To answer this question, I assume that transfers are proportional tohousehold size (scheme 2) and that each household receives $500 per capita inconstant I973 dollars. In general, larger proportionate reductions are foundlater in the sample period for cash and all in-kind transfers (Fig. I2).In I96Ithe pre-transfer poverty rate is OI95 while the post-transfer poverty rates(excluding energy) are clustered around o I00. Thirty years later thecorresponding poverty rates are o-o85 and 0-020 respectively. Perhaps morerelevant is the fact that, at this level of subsidisation, the impact on the povertyrate is similar for all goods except energy and is not very different from a cashgrant.

0-2 l l l0-18 -0-16 -0-14 -0-12-

D 008 -006 -0-04-0-02-

1960 1965 1970 1975 1980 1985 1990YearFig. I 2. Post-transfer poverty rate. x -, Pre-transfer; , Energy; ----, Food;------, Consumer goods;...., Capital services; -----, Consumer services; -------Food and capital; -*-, Cash.

25 This is obviously the result of measuring poverty using the head count ratio. Other indexes that aresensitive to the intensity of poverty would decrease over this range of transfers.( Royal Economic Society I996


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I544 THE ECONOMIC JOURNAL [NOVEMBERV. SUMMARY AND CONCLUSION

In-kind benefits have grown in importance over the last thirty years asinstruments of transfer policies in the United States. As a result, it is importantto assess the efficiency losses that accompany this type of subsidy as well as theireffectiveness in reducing poverty. It has long been recognised that this requiresthe calculation of the consumption value of the in-kind benefits. Less commonis the recognition that this exercise also requires comprehensive consumptiondata describing the expenditure patterns of the recipients. In this paper, suchdata have been used to assess the efficiency of in-kind transfers relative to cashgrants and their impact on the level of poverty.The ability of the programme to alleviate poverty depends both on theability of the government to target the benefits as well as their effectiveness inraising the welfare of the recipients. Under the assumption of accuratetargeting to the consumption poor, the average efficiency losses of in-kindbenefits are quite low for some goods and certain multiple good transfers arenearly equivalent to cash grants in terms of their welfare effect. On the margin,however, the higher losses and both the average and marginal losses increasesharply, as expected, with the level of the transfer.Are in-kind benefits a good way to reduce poverty when targeted to theconsumption poor? With the exception of energy and consumer goods, in-kindtransfers have roughly the same impact on the poverty rate as cash. Thelimitations of these programmes seems to be the manner in which the benefitsare distributed to recipients. For the three redistribution schemes considered,there is substantial variation in the degree of poverty alleviation at the differentlevels of subsidisation for both the in-kind transfers as well as the cash grants.Theoretical results have been presented which suggest that, because ofimperfect information on the part of the government, in-kind transfers moreaccurately target those who need the benefits the most. The empirical resultspresented in this paper complement these findings. If in-kind benefits areprovided to the consumption poor, the efficiency losses are quite small and theirability to reduce poverty is similar to equivalent cash grants. Contrary topopular opinion, in-kind transfers may well be an effective means of providingsupport to the poor.University of TexasDate of receiptoffinal typescript:FebruaryI996

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