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Entitlement fetching or snatching? Effects of arbitrage on India’s public distribution system

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  • Chakrabarti, Suman
  • Kishore, Avinash
  • Roy, Devesh

Abstract

Would households be able to buy more subsidized grains from a food-based safety-net program if the difference between prices in the program and in the open market were to increase? This is an important question for safety-net programs anywhere in the world, but particularly so for the public distribution system (PDS) of grains in India—the largest food-based safety-net program in the world. The standard economic intuition suggests that price controls distort signals and create incentives for unintended transactions. Price difference between the PDS and the open market compromise entitlements and divert grains to open markets—an entitlement-snatching effect. Drèze and Sen (2013), however, posit the opposite—an entitlement-fetching effect, where an increase in arbitrage increases the value of PDS entitlement. This raises the stakes in the PDS for eligible beneficiaries, resulting in a rise in accountability and ultimately an increase in household purchases of grains from the PDS. We test these two competing hypotheses using multiple datasets: consumer expenditure surveys conducted by the National Sample Survey Organization, and panel datasets from the India Human Development Survey and the Village Dynamics in South Asia. Depending on the context, we find both entitlement-snatching and entitlement-fetching effects. In states where welfare programs are better governed, the Drèze and Sen (2013) conjecture holds. Conversely, in states like Bihar and Jharkhand—where welfare programs are poorly run—the opposite pattern holds; that is, households’ purchase of subsidized grains recedes with greater arbitrage.

Suggested Citation

  • Chakrabarti, Suman & Kishore, Avinash & Roy, Devesh, 2016. "Entitlement fetching or snatching? Effects of arbitrage on India’s public distribution system," IFPRI discussion papers 1588, International Food Policy Research Institute (IFPRI).
  • Handle: RePEc:fpr:ifprid:1588
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    References listed on IDEAS

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    1. Timothy Besley & Robin Burgess, 2002. "The Political Economy of Government Responsiveness: Theory and Evidence from India," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1415-1451.
    2. Attanasio, Orazio & Di Maro, Vincenzo & Lechene, Valérie & Phillips, David, 2013. "Welfare consequences of food prices increases: Evidence from rural Mexico," Journal of Development Economics, Elsevier, vol. 104(C), pages 136-151.
    3. Mehta, Aashish & Jha, Shikha, 2014. "Pilferage from opaque food subsidy programs: Theory and evidence," Food Policy, Elsevier, vol. 45(C), pages 69-79.
    4. Jean Drèze & Reetika Khera, 2013. "Rural Poverty And The Public Distribution System," Working papers 235, Centre for Development Economics, Delhi School of Economics.
    5. Jha, Shikha & Srinivasan, P. V., 1999. "Grain price stabilization in India: Evaluation of policy alternatives," Agricultural Economics, Blackwell, vol. 21(1), pages 93-108, August.
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    Cited by:

    1. Lucie Gadenne, 2020. "Can Rationing Increase Welfare? Theory and an Application to India's Ration Shop System," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 144-177, November.
    2. Sudha Narayanan & Nicolas Gerber & Udayan Rathore & Karthikeya Naraparaju, 2017. "Can Social Safety Nets Protect Public Health? The Effect of India's Workfare and Foodgrain Subsidy Programmes on Anaemia," Working Papers id:12296, eSocialSciences.
    3. Negi, Digvijay S., 2022. "Global food price surge, in-kind transfers and household welfare: Evidence from India," World Development, Elsevier, vol. 158(C).

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    Keywords

    subsidies; households; welfare;
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