Substitution in Household Production and the Efficiency of in-Kind Transfers

Abstract

The traditional argument for in-kind transfers rests on their ability to induce greater consumption of externality-causing commodities. This paper shows that this effect will be diminished the greater the possibilities for substitution in household production. The argument rests on the distinction between market goods which can be subsidized and the commodities donors value which are produced in the household. If the price of the market good is reduced through a subsidy, consumers will react in part by producing the commodity with an altered ratio of inputs.