In-kind transfers and home production

Why are in-kind transfers a prominent feature of the U.S. social safety net, and why is such a significant fraction of these benefits given to individuals who do not actively supply labor in the market? This paper presents home production as a novel rationalization for such transfers. It first shows that in a broad class of dynamic Mirrleesian models that include only market production, the optimal allocation features undistorted marginal rates of substitution between goods whenever agents are not working, and thus in-kind benefits provided to these agents do not help decentralize an optimal allocation. However, adding home production drastically changes the nature of the optimal allocation. In particular, if goods and labor are substitutes in home production and home and market productivity are positively correlated, in-kind benefits in the form of goods used in home production, such as groceries, energy, and housing capital, should be provided to agents who do not work. A numerical simulation shows that the optimal in-kind program for disabled workers in a plausibly calibrated version of the home production model is consistent with the scale of SNAP and other programs that provide home production goods in the U.S.