Optimal in-kind benefits in means-tested programs

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We investigate whether welfare benefits should be provided in-kind or in-cash. While an in-kind transfer, if well-designed, can be attractive only to its targeted low-income beneficiaries, this argument is weakened in a means-tested welfare program since means-testing already serves as a screening tool. We examine whether we can rationalize an in-kind benefit when means-testing is already in place?We characterize the optimal allocations when a social planner does not observe individuals’ productivity and designs an allocation scheme based on individual’s self-report productivity. A common solution is that individuals reporting low productivity should have their leisure over-provided and consumption goods under-provided. Our study extends this finding in a framework where individuals derive utility from several consumption goods, some of which are produced at home, i.e., they require both time and input goods purchased from markets. Our results show that since individuals can reallocate the over-provided leisure time to home production activities, high and low productive individuals value input goods for home production differently. This allows the social planner to refine its allocation scheme to better target low productive individuals.Our on-going work shows that the implementation of this allocation involves mean-testing and a complex tax system, especially when there are more than one home-produced consumption goods. We find that in some cases the complex tax system can be, to a certain extent, simplified by using an in-kind benefit.