Welfare effects of an in-kind transfer program: Evidence from Mexico

This paper proposes an approach for ex-ante welfare analysis under in-kind transfers based on demand system estimation and construction of virtual prices (i.e., the at which beneficiaries would be as well off with subsidy). As application this approach, I study a program randomly transferred either food basket, procured discount in wholesale markets, or equal-cost cash transfer to poor households rural Mexico. find large welfare-destroying distortions from corresponding average 35% its face value. Efficiency losses are larger more vulnerable recipients, provided relatively allotments commodities consumed lower shares by poor. Counterfactual simulations providing better-targeted suggest that gains could enhanced up 38% compared subsidy, while also reducing regressivity transfer. • assessment transfers. The is price construction. efficiency provision regressive: poorer recipients. A well-targeted enhance