Consumer Response to Monetary Subsidies: A Structural Demand Analysis of the Supplemental Nutrition Assistance Program

There is growing debate about whether consumer subsidies related to nutrition programs should be more flexible. Additional flexibility increases consumer welfare but may hinder efforts toward achieving nutrition goals. We study how consumers would respond to subsidy designs with different spending restrictions. To simulate consumer behavior under different subsidies, we develop a direct utility model that integrates consumer decisions for brands, categories, and stores. This model is used to simulate consumer behavior for benefit designs that are not observed in practice but are often part of the policy debate. We apply the model to quantify the effects of supplemental nutrition assistance program (SNAP) benefits relative to alternative subsidy designs. Our findings indicate that SNAP benefits can be effective in driving food purchases, although on average only 70% of the subsidy would get spent, and only half of that would lead to greater food spending. The latter is driven by sizable spillovers toward other categories not covered under the program. To quantify the consumer welfare implications associated with alternative subsidy designs, we find that, on average, consumers would be willing to trade $1.00 in SNAP benefits for $0.29 in unrestricted cash benefits because of the spending restrictions associated with food stamps.