Optimal in-kind benefits in means-tested programs

2020 Fiscal Year Research-status Report

• Project/Area Number: 20K01676
• Research Institution: National Graduate Institute for Policy Studies
• Principal Investigator: Porapakkarm P. 政策研究大学院大学, 政策研究科, 准教授 (10751266)
• Project Period (FY): 2020-04-01 – 2023-03-31
• Keywords: In-kind transfer / home production / optimal taxation / moral hazard

Outline of Annual Research Achievements

Should means-tested benefits be provided in-kind or in-cash? A criticism of in-kind provision is that it limits choices of beneficiaries compared to equivalent cash transfers. Despite this, mean-tested in-kind transfers are universal in most countries. We ask whether we can rationalize providing benefits at least partially in-kind when means-testing is already in place. And if so, what goods should be delivered in-kind?

In our framework agents differ in unobserved labor productivity and it is desirable to redistribute from high to low productivity types. Due to information frictions, high productivity types can always pretend to be low productivity ones by working less. Agents derive utility from several consumption goods, including those produced at home which require both time and market inputs. We distinguish two types of market inputs: one is substitutable with time, and the other is complementary. A typical solution in literature is that agents claiming to be low productivity type should have their leisure over-provided and consumption under-provided. In our framework, abundance of leisure lowers marginal costs of time for home-produced goods, thus changing the relative value of substitute and complement inputs. We derive two sufficient conditions that complement input becomes more valuable and substitute input becomes less valuable. This differential effect gives an additional instrument for a social planner, e.g. a centralized economy, to reduce attractiveness of mimicking strategy.

Current Status of Research Progress

4: Progress in research has been delayed.

Reason

So far, due to the Covid-19 situation and new working environment, we have made less progress than our original plan. Specifically, we cancel our research meeting trip in 2020 and delay the hiring of research assistants to help us on the empirical data due to the difficulty of supervision.
We expect to resume the normal collaboration in the later half of 2021, and try to be back on our plan in 2022.

Strategy for Future Research Activity

For the next step, we will relate our current findings to an optimal in-kind transfer scheme. Specifically, we turn to possible implementation schemes of optimal allocations described above in a decentralized economy. We will first investigate the role of non-linear taxes system commonly proposed in literature. We plan to show that the implementation scheme using joint non-linear consumption taxes can be too complex and impractical. This potentially gives rise to the use of a simpler scheme such as in-kind transfers. In addition, using our theoretical framework, we will be able to specify the characteristics of goods which should be transferred in-kind.

Causes of Carryover

Due to the Covid-19 situation and travel restriction, I and my collaborator had to postpone our research meeting trips and the hiring of research assistant to the later half of 2021.