Why do governments provide food stamps instead of cash? Classic economic theory suggests cash is superior because it allows recipients to optimize their spending. Yet in-kind programs: Government assistance provided as specific goods or services (such as food vouchers, housing subsidies, or health care) rather than unrestricted cash. Recipients can only use these benefits for designated purposes. like SNAP (Supplemental Nutrition Assistance Program): The US federal program that provides food assistance to low-income individuals and families. Formerly known as food stamps, SNAP provides electronic benefits that can be used only to purchase eligible food items at authorized retailers. dominate US welfare spending. Voters and policymakers prefer such programs because they worry cash will be spent on drugs, alcohol, or other “inappropriate” purchases. But is this concern justified?
This paper brings new evidence to this debate. The authors provide the first direct test of whether cash transfers and food stamps lead to different consumption patterns in the same population. Using two decades of data from South Carolina, the authors track individuals receiving both cash benefits from Supplemental Security Income (SSI) and in-kind benefits from SNAP. They link benefit receipt records to detailed health care utilization data, examining how outcomes change in the days following each transfer’s scheduled monthly payout.1
They find the following:
- Emergency department (ED) visits for drug and alcohol use increase by 20-30% in the week following SSI receipt, but do not respond to SNAP receipt. Even after adjusting for the fact that SSI benefits are about four times higher than SNAP benefits, the authors confirm that cash and SNAP appear to have significantly different impacts on consumption of drugs and alcohol.
- Fills of prescription drugs for new illnesses also increase by 20-40% following SSI receipt but do not respond to SNAP receipt.
These findings reveal an important result: Cash and food vouchers are not used interchangeably. Since most SNAP recipients already spend more on food than their benefit amount, food stamps should free up cash for other purchases. If this were true, SNAP would increase spending on temptation goods, just as cash does. The fact that it doesn’t suggests recipients mentally treat SNAP as designated “food money.” The authors incorporate this mental accounting: The psychological phenomenon whereby people treat money differently depending on its source or designated use, even when all money is objectively fungible (interchangeable). For example, people may treat a tax refund differently from regular wages, or treat “food money” differently from other income, leading to spending patterns that deviate from standard economic predictions. , along with self-control problems (over consumption of temptation goods) into a framework for selecting the optimal combination of cash and SNAP for a fixed-budget transfer program.
This approach reveals the following:
- When recipients have self-control problems, the government should provide some of each benefit type. The worse people’s self-control issues, the more welfare assistance should come as food stamps rather than cash. Additionally, the stronger people’s mental accounting, the less welfare assistance should come as food stamps. This is because when mental accounting is strong, recipients increase their food spending nearly dollar-for-dollar with their SNAP benefit. Since each SNAP dollar is so effective at increasing food consumption, the government needs less SNAP to achieve its target food consumption level and can provide more of the transfer as cash.
- The authors also consider whether a ‘ sin tax: A tax levied on goods or activities considered harmful or undesirable, such as tobacco, alcohol, or gambling. Also called excise taxes or Pigouvian taxes, these are designed to discourage consumption by increasing prices, while potentially generating revenue to address negative externalities associated with the taxed goods. ‘ on drugs and alcohol could replace the need for food stamps. They find that even with access to sin taxes, providing some benefits as SNAP may still be optimal. This is because a uniform sin tax treats everyone identically, while people vary dramatically in their self-control problems and mental accounting behavior. SNAP, by contrast, allows for targeted assistance. Recipients who struggle more with self-control can receive a higher share of benefits as food stamps, while those with better self-control receive more cash.
The findings have direct implications for ongoing policy debates about the mix of cash versus in-kind assistance. While the authors focus on paternalistic social policy in the United States, similar policies exist worldwide. For instance, in Brazil, concerns that a large share of a cash transfer program for the poor (Bolsa Familia) was being spent on on-line gambling recently prompted the government to prohibit use of cash transfer program cards for online betting. The framework developed here could be adapted to analyze such policies whenever self-control problems and mental accounting shape spending decisions.