Levedahl's explanation for the cashout puzzle in the U.S. food stamp program: a comment

Abstract

The “cashout puzzle” is an anomalous empirical regularity noted in studies of the Food Stamp Program, namely that the marginal propensity to consume food out of food stamps is much higher than that out of cash income for those households which spend some cash on food. See Fraker (1990) for a review. The receipt of food benefits in the form of stamps instead of cash does not constrain these households, hence, according to standard microeconomic theory (first considered for the case of food aid by Southworth (1945)), these households would not change their behavior if food stamp benefits were "cashed out". Consequently, according to the standard theory, marginal propensity to consume food out of cash income should be identical to that out of food stamps. In a paper in this journal, Levedahl (1995) offers an interesting explanation for this puzzle. He conjectures the that marginal propensity to consume food out of stamps is higher than that out of income because the marginal utility of food stamp income is less than that of cash income. In this note, we show that this explanation is questionable. Levedahl's condition, by itself, is neither sufficient nor, indeed, necessary to predict that an unconstrained household will reduce its consumption of food when food stamps are converted to cash income.