Cash Transfers and Status Quo Bias

One advantage that cash transfers have over “in kind” redistribution (e.g., providing people directly with medical care rather than cash that could be spent on medical care) is that cash tends to be better for the recipient. Briefly put, if the recipient prefers the bundle of goods that state would have provided with in kind redistribution, they can use their cash to buy it. If they prefer something else, they can buy that instead. So the recipient is no worse off as a result of having cash and potentially better off.

An important objection to replacing in kind redistribution with cash transfers is that the former may make it more difficult to make bad consumption choices. For instance, you can use cash but not SNAP benefits to play roulette. But I’m not convinced this consideration should lead us to reject cash transfers.

In an earlier post, I discussed status quo bias—roughly, our tendency to prefer the status quo even when a change would be better. I explained:

To guard against this bias, we can use the reversal test. Suppose you oppose the use of biotechnological enhancement to increase human life expectancy. Now ask yourself if you’d support decreasing human life expectancy. Probably not. So you support neither increasing nor decreasing human life expectancy, meaning that the status quo just so happens to get things exactly right. This is of course possible, but it would be a rather convenient coincidence. At a minimum, this convenient coincidence should prompt you to consider that your opposition to changing human life expectancy is due to status quo bias.

Let’s bring this back to issue of cash transfers versus in kind redistribution. If we’re concerned about limiting recipients’ ability to make bad consumption choices, we could make the existing system of redistribution even more restrictive. We could, for instance, replace SNAP benefits with meal deliveries to give recipients less control over what they eat. We could also replace Social Security—a cash transfer—with government-run retirement facilities to ensure that retirees don’t spend too much on roulette.

I suspect most people would balk at these proposals. But this suggests that the status quo has just the right amount of restriction—not too much, but not too little. Of course, maybe it does, but that would be a convenient coincidence; consequently, there’s reason to think that status quo bias might be at play here.

It’s also worth asking why making the existing system of redistribution more restrictive is unattractive. Here’s my hunch: the government simply isn’t well placed to know what our dietary and retirement needs are. Living in a retirement home might not be the best option for you, so it’s better to have cash that you can spend on whatever is the best option for you. It’s true that some people might gamble their Social Security away, but few conclude that we should get rid of Social Security and impose a one-size-fits-all form of redistribution to prevent this sort of unwise choice.