This chapter empirically analyses the effect of in-kind versus cash transfers on household consumption behaviour. Redistributive welfare programme motivated by paternalism are often implemented in-kind to promote outcomes that might not be achieved under cash transfers. Using evidences from a natural experiment in Bangladesh, where the same set of households were treated to different types of transfer, food grains and cash, at two different periods in time; we test whether this form of paternalism is necessary. A fixed effect instrumental variable model is used in the estimation and the comparison of household's behaviour under each type of transfer. This estimation fixed the endogeneity in treatment variables as a result of failure to account for household-specific fixed effect and selection into treatment. The estimation results show that though in-kind food grains transfers did caused households to consume more grain than they would have chosen under an equal-valued cash transfers, the impact on calorie consumption and children health status is minimal. Households who received cash were able to reallocate their funds more effectively, and chose to spend their extra income on children's education, purchase of useful items such as clothing and children's non-food consumption, while at the same time spending no more on vices such as cigarettes. While other justifications for providing transfers in-kind may certainly be valid, the evidence supporting the paternalistic one in this context is minimal.

Keywords: In-kind transfers, Paternalism, Bangladesh

JEL classification: H43, D12, O12, I38

Author's specialisation JEL code: O12, D31, C81