When preferences exhibit certain interdependencies, redistributive transfers
can make everyone better off. However, the optimal form of such transfers
depends on the nature of the postulated externalities. Lump sum transfers
cannot achieve some Pareto optima if interdependence involves particular
commodities. Here, price subsidies or earmarked (voucher) transfer
schemes are required. However, if the interdependence relates to the
general welfare of recipients, cash transfers are preferable. Preferences
revealed in the political process in favor of in-kind programs suggest
"particular-commodity" interdependence. But even if this is so, the
analysis does not provide a conclusive case for in-kind transfers. Among
other things, comparative costs of administering and policing in-kind as
opposed to cash programs must also be considered.
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