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Variable Rate Subsidies: The Inefficiency of In-Kind Transfers Revisited

Staff Report 76 | Published February 1, 1983

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Author

Michael J. Stutzer Professor of Finance, University of Iowa

Variable Rate Subsidies: The Inefficiency of In-Kind Transfers Revisited

Abstract

The inefficiency of fixed rate consumer price subsidies, relative to cash transfers, is one of the best-known propositions in welfare economics. It has also been used to show that matching grants are a more inefficient intergovernmental aid than are lump sum grants. Furthermore, the cost of fixed rate subsidies cannot be controlled without providing a “cap” beyond which amount no subsidy is received. This paper reports, both qualitatively and quantitatively, that a broad class of variable rate price subsidies also dominates fixed rate subsidies on both counts. The relative inefficiency of matching grants compared to the variable rate Federal General Revenue Sharing program is estimated.