Optimal In-Kind Redistribution

TL;DR

This paper models in-kind redistribution mechanisms involving private markets and government programs, identifying optimal policies that combine public options, subsidies, and laissez-faire, and analyzing their effects on social welfare and distortions.

Contribution

It introduces a comprehensive model of in-kind redistribution with a novel characterization of optimal mechanisms involving three components.

Findings

Optimal mechanisms include a public option, nonlinear subsidies, and laissez-faire.

Private market access both constrains and justifies non-market allocations.

The model quantifies distortions related to demand and welfare weight correlation.

Abstract

This paper develops a model of in-kind redistribution where consumers participate in either a private market or a government-designed program, but not both. We characterize when a social planner, seeking to maximize weighted total surplus, can strictly improve upon the laissez-faire outcome. We show that the optimal mechanism consists of three components: a public option, nonlinear subsidies, and laissez-faire consumption. We quantify the resulting distortions and relate them to the correlation between consumer demand and welfare weights. Our findings reveal that while private market access constrains the social planner's ability to redistribute, it also strengthens the rationale for non-market allocations.