The political economy of in-kind versus cash redistribution in Europe

Why is the distribution of government spending between cash and in-kind transfers so heterogeneous across European countries? In this paper, we present a theoretical model showing that this difference depends on citizens’ trust in their own political institutions. When citizens do not trust their political institutions, they are more likely to believe that those institutions will waste economic resources while providing public services, reducing their quality. As a response, citizens demand more cash transfers at the expense of fewer in-kind transfers to minimise the quantity of low-quality services they receive. The model also shows that: (i) higher expected income increases the support for in-kind transfers and reduces support for cash transfers; (ii) paternalism increases the support for in-kind transfers over cash transfers; (iii) lower levels of civic capital reduce the demand for cash transfer and, under specific conditions, increase the demand for in-kind transfers. We conclude our analysis by testing our model’s predictions using cross-sectional data for 20 European countries. Our descriptive analysis shows that institutional trust is associated with a higher probability of supporting public investments in training programmes for the unemployed (in-kind transfers) over unemployment benefits (cash transfers). This relationship is larger in countries with higher-quality public services.