This paper revisits the claim that public provision of in-kind transfer is more efficient than transfers in cash. A simple job search model suggests that moral hazard would become more severe if recipients can save the transfer payment privately (the ...
This paper revisits the claim that public provision of in-kind transfer is more efficient than transfers in cash. A simple job search model suggests that moral hazard would become more severe if recipients can save the transfer payment privately (the hidden saving problem), inducing them to make less effort to find jobs (that is, double deviation problem). We show that because the hidden saving problem always exists, economic efficiency requires overprovision of inkind transfers and undersupply of cash grants. Our finding suggests that saving is not a virtue for government transfers.