IN‐KIND VERSUS CASH TRANSFERS in the PRESENCE OF DISTORTIONARY TAXES

In‐kind transfers can Pareto‐dominate cash transfers as a means of income redistribution if in‐kind transfers and leisure are Hicks substitutes and leisure is a normal good. The result holds when redistributive instruments also include a linear income tax. The paper proves that if the poor receive more in‐kind transfers (and the rich less) than what they would choose for themselves then, compared to cash transfers, there will be a higher labor supply by the poor, a lower labor supply by the rich, and higher levels of aggregate pre‐tax income and tax revenues.