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In-Kind and Cash Transfers
Suppose that an eccentric millionaire decides to help a
poor neighbor by giving him $1000 worth of nontransferable
hat certificates--certificates that could be used to buy
hats but nothing else. Is this gift of the same value to the
poor neighbor as a gift of $1000 in cash? Economists answer
that generally a gift in kind has less value than a
cash gift because it has restrictions. A cash gift gives
more options, and economists usually assume that more
options never harm a person, but may help one.
The argument that cash gifts are superior to in-kind
gifts can be shown with budget
lines. In the graph below, the poor neighbor originally
faces budget line A-B. A gift of $1000 worth of hat
certificates means the person could buy more hats than he
could previously have bought, or if all income were spent on
hats, he could buy O-E rather than the O-B
that he could have had before. There is no increase in Other
Goods that he can buy if he spends all his income on them.
As a result, the new budget line is A-C-E. A gift of
$1000 in cash, on the other hand, would increase not only
the number of hats that is possible, but also the amount of
Other Goods. The new budget line with a cash gift is
D-C-E. The dotted portion D-C represents the
options that cash gives, but which the in-kind transfer does
not allow. Because few people spend very much of their
incomes on hats, most people prefer to be on the segment
D-C rather than C-E. In this case, the gift in
kind is less valuable to the recipient than a gift in
cash.
This analysis has underlying assumptions, as all economic
analyses do, and if these assumptions do not hold, the above
conclusion may not either. First, it assumes that there is
no cost in making decisions. Making decisions often involves
gathering information, weighing it, and worrying about
whether the decision is correct or not. Anyone who has had
to choose between two good job offers knows the agony that
making a decision can entail. Further, some people recognize
that they do not make good decisions and hire others to do
so for them. This shortcoming explains the career of
financial advisor, in which people draw up budgets for
others and in some cases make the actual purchases. Thus, if
the giver knows of items that the recipient would like but
does not know about, if the cost of making decisions is
high, or if the individual is not capable of making
decisions that get him to his goal, the recipient may be
better off with the in-kind transfer than with a cash
transfer.
Most gifts between friends are not for cash but are
in-kind gifts. Most girls would be upset if their boyfriends
gave them money for birthdays or Christmas. Gifts between
friends are a way of cementing ties and give rise to
obligations. They play an important role in helping
small-group associations run smoothly. An in-kind gift
indicates that the giver is interested enough in the
recipient to learn about the recipient's likes and dislikes,
and has spent time doing this and in obtaining the gift. The
simple economic analysis of our graph does not capture these
subtleties. Though anthropologists have studied gift-giving
more than economists, some economists do consider it
important. For example, Kenneth Boulding's Economics of
Love and Fear argues that there are three mechanisms
that help hold groups together: the integrative mechanism of
gift-giving and love, voluntary and mutually advantageous
exchange, and coercion and threat.1
Third, the economic analysis of the picture above refers
only to the recipients' preferences, not to those of the
donors. A donor may disapprove of the goals that the
recipient pursues, and thus may be unwilling to let him make
choices. Economists are a bit unusual because they generally
assume that people know what is best for themselves. As a
result, most are reluctant to approve of desires of donors
to deny choices to recipients.
A final reservation with the above analysis is that
people often pursue goals that involve status, and pursuit
of status is a zero-sum game. When one person rises in
status, others must fall relative to him. If I am forced to
help others, I will be less resentful if my help does not
change their status, especially if those being helped are
close to me in status. One way to make sure that my help
does not change their status is to give them specific goods
that have no status: things such as free health care, public
housing, and free food. In contrast, giving others money
allows them to purchase items that convey status, such as
fancy cars and faddish brands of shoes and clothing. People
who receive government aid and who have new cars are often
intensely resented by those who almost qualify for the aid.
Perhaps an important reason for the persistence of many
forms of in-kind grants in the face of the opposition of so
many economists is that the economists are ignoring the
quest for status.
The question of whether in-kind transfers are better than
cash transfers is important when governments devote hundreds
of billions of dollars to transfers. At one time the
government gave food to the poor; now it gives food stamps.
The in-kind versus cash argument was involved in the switch
(though it may not have been the decisive factor). The
government attempts to help poor people by building and
providing public housing; would the poor be better off if
the government provided money instead of the housing? The
government provides education by providing free schools, but
students can rarely choose which free school they attend.
Would they be better off if the government stopped producing
education and instead provided them with a "tuition
voucher," a sum of money that they could use at the school
of their choice? The present system of transfers is a
mixture of cash and in-kind transfers that is only partially
explainable in terms of the recipients' welfare.
The topic of present
value follows naturally from the discussion above.
1Belmont, Calif., Wadsworth Pub.
Co. 1973.
Copyright
Robert Schenk
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