The Political Economy of In-Kind Redistribution

Why do politicians redistribute resources through in-kind rather than cash transfers? This paper examines political incentives for in-kind government redistribution. By analyzing the political game between o¢ ce-motivated politicians and self-interested citizens, I �rst show that in economies with competitive markets in-kind transfers are not required. Politicians can win elections targeting groups of voters with differential cash transfers. However, in-kind transfers arise in the presence of externalities in consumption. In that case, targeting groups of voters with in-kind rather than cash transfers allows politicians to attract simultaneously voters in additional groups with the same amount of resources. Politicians undertake political redistribution depending on the expected electoral returns obtained from targeting both cash and in-kind transfers into di¤erent groups. Furthermore, electoral competition leads the economy to achieve Pareto efficient allocations that markets cannot reach. Politicians internalize the presence of external effects when competing for marginal voters who could swing their vote.