Consumption and Poverty

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

Source: The Economic Journal, Vol. 106, No. 439 (Nov., 1996), pp. 1527-1545
Published by: Wiley on behalf of the Royal Economic Society
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(
Royal Economic Society I996. Published by Blackwell
TheEconomicJournal,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,the efficiency
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 ConsumerExpenditureSurveys (CEX) are used to assess the
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
+n2npB
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).
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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)
M(p, Wk,Ar)'
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
lnM(p, Wk, Ak)
D(p)
In p +'In pB
(i)
is parameterised as:
In p-Wk) +ln mO(p,Ak),
where the equivalence scale is of the form:8

ln mO(p, Ak)
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
I 964.9
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.
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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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025
AND
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I53I
1965
1970
1975
1980
1985
0-2
0-15
0.1
0 05
1960
1990
Year
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
E Mk
k=1
WL
KL
PL(p, pr
)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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3000
2500
2000
4.
1500
0
1000
500
1960
1965
1970
1975
1980
1985
1990
Year
Fig.
2.
Consumption
to needs ratio.
, Non-poor population;
Poverty threshold; - - -,
Poverty population.
increase occurs between
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
1965
1960
1970
1975
1980
1985
1990
Year
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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0-6
0-5
040
......2~~~~~~~~~~~~~~~~~~~~~
. . .. . .. .
0-4-
4.03
~03
--- ----
. .=
-----
---
--
--
-- --
-.
--
----
---
?- -.
0-2
0.1
1960
1965
1970
1975
1985
1980
1990
Year
Food; ----, Energy;
Fig. 4. Consumption patterns of the non-poor.
;
Capital services; -----, Consumer services.
III.
THE DEADWEIGHT
LOSS OF IN-KIND
Consumer goods;
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
otherwise,
MW(p*%Mk
)Ak)
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:
*
nr
tnk
nk
E
i*n
R3pn Inpi
(9pjp
____
where Mk*
+ +/?nn
Mk +Pn*k Xnk iS
+Ap lvnpnInnk
l
i*n itn j
( ipnp
InM* +
ji
,ni
A'
2
npi
i
I-v
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:
= M(p, W',
D WL (p Mk,Bk,Ak)
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)
AD WL
k
(3k)
KL
E
Bnk
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
MD WLn=
i
k=l1
DWLn(p, Mk,Bnk) Ak)

L*
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
05
2 04
C)
0-3
02
500
1,000
1,500
Transfersper capita
Fig. 5. Average deadweight loss- I990.

, Energy;
Consumer services;
, Capital services; -.-.-,
2,000
2,500
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
08
0v
0
.-
,.
..
..
1 9000
1 9500
Transfersper capita
500
Fig. 6. Marginal deadweight loss 190

, Energy;
, Capital services; - ---, Consumer services;
21000
2,500
Consumer goods;
Food;------,
,
Food and capital.
0-7
0-6
0*5
rA
04-
08) Roa Ecnoi0-3
Soit
I996
0*2
?1I
X.
1960
1965
1970
1975
1980
--
1985
1990
Year
Fig.
-7.
Average deadweight loss.

Capital services; -
~, Energy;
,Consumer
-,
services;
Food;x-
Consumer goods;
odadcptl
? Royal Economic Society 1996

I996]
CONSUMPTION
AND
I539
POVERTY
0-8-
0-601 .
..... ... .
..........
.. ....
0-4-
.,-.----
......--------
o-
.......
. _
1960
1965
I.
1970
'.
1975
Year
1980
Fig. 8. Marginal deadweight loss.

, Energy; ----,
, Capital services; --- -, Consumer services;
1985
Food; ------,
1990
Consumer goods;
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
I996

I540
THE
ECONOMIC
JOURNAL
[NOVEMBER
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.

1996]
CONSUMPTION
AND
POVERTY
I54I
0-08 ,
007
0-06
005
g004,_
0-03
0.02
0*0
0
500
1,000
1,500
Transfersper capita(currentdollars)
povertyrate (1990)
Fig. 9. Post-transfer
goods;,....,
Capital services;
-----,
Schemei.
Energy;
Consumer services; ------,

Cash.
-A-,
2,000
2,500
Food;------- Consumer
Food and capital;
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
I996

1542
THE
ECONOMIC
0 08 ,
[NOVEMBER
JOURNAL
007
0-06
o005
8004
003
002 -
0*0
0
500
1,000
1,500
Fig. IO. Post-transfer

povertyrate(i 990)
goods;,....,
Capital services;
-----,
0 08,
&
Scheme2.
, Energy;----Consumer services; ------,

Cash.
-A-,
2,000
2,500
Food;------- Consumer
Food and capital;
007
006
.0-04
003
0-02
0*01
0
500
- - - - -r
Fig. i i. Post-transfer
povertyrate( I990)
goods;,....,
Capital services;
- Scheme3
---,Consumer
-A,
1,000
1,500
, Energy;----,
services; ------Cash.
2,000
Food;-
2,500
Consumer
Food and capital;
I996

I996]
CONSUMPTION
AND
POVERTY
I543
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
1960
1965
1970
0-18 0-16 0-14 0-12-
D 008 006 0-040-02-
Fig.
------,
1975
Year
1980
1985
1990
x -,
, Energy; ----,
Post-transfer poverty rate.
Pre-transfer;
Food;
Consumer goods;,....,
Consumer services; ------Capital services; -----,
Food and capital; -*-,
Cash.
I 2.
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.

I544
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V. SUMMARY
AND
JOURNAL
[NOVEMBER
CONCLUSION
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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Consumption and Poverty: How Effective are In-Kind Transfers?

Author(s): Daniel T. Slesnick

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AND POVERTY: HOW EFFECTIVE

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Income is an inappropriate foundation for the identification of the poor since

A consumption-based poverty measure is calculated using an absolute standard

where D (p) = i- + t'Bppln p, m0(p, Ak) is a household equivalence scale and

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households through the equivalence scales. Following Muellbauer (I974), the

where M(.) is the expenditure function and Ar is the vector of characteristics

lnM(p, Wk, Ak)

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

where the equivalence scale is of the form:8

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

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

lnm(Ak) = BPBA Ak, and BPA is a matrix of unknown parameters.

C Royal Economic Society

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The ability of in-kind transfers to alleviate poverty depends on accurate

( Royal Economic Society

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in I973, increases between I973 and I980 and attains a minimum of

C Royal Economic Society

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increase occurs between

and the remainder between

( Royal Economic Society I996

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and subsequently decreased to I 3 0 by

goods, which consist primarily of clothing, fell from I6 % of total expenditure

( Royal Economic Society

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The structure of transfer programmes in the United States reveals a

This terminology originated with Tobin

C Royal Economic Society I996

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Ak) > Bnk

( Royal Economic Society

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D WLn(p, Mk, Bnk, Ak)

DWLn(p, Mk,Bnk) Ak)

(C Royal Economic Society I996

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Fig. 5. Average deadweight loss- I990.

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

,Food and capital.

( Royal Economic Society

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Fig. 6. Marginal deadweight loss 190

Food and capital.

08) Roa Ecnoi0-3

Average deadweight loss.

? Royal Economic Society 1996

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Fig. 8. Marginal deadweight loss.

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The inefficiency of in-kind transfers relative to cash is only part of an assessment

( Royal Economic Society I996

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Consumer services; ------,

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Fig. IO. Post-transfer

, Energy;----Consumer services; ------,