David K. Evans and Anna Popova: Cash Transfers and Temptation Goods

Abstract: Cash transfers have been demonstrated to improve education and health outcomes and alleviate poverty in various contexts. However, policy makers and others often express concern that poor households will use transfers to buy alcohol, tobacco, or other “temptation goods.” The income effect of transfers will increase expenditures if alcohol and tobacco are normal goods, but this may be offset by other effects, including the substitution effect and the effect of social messaging about the appropriate use of transfers. The net effect is ambiguous. This article reviews 19 studies with quantitative evidence on the impact of cash transfers on temptation good expenditure, as well as 11 studies that surveyed whether respondents reported they used transfers to purchase temptation goods. We conduct a meta-analysis to gauge the average impact of transfers on temptation goods. Results show that on average cash transfers have a significant negative effect on total expenditures on temptation goods, equal to −0.18 standard deviations. This negative result is supported by data from Latin America, Africa, and Asia, for both conditional and unconditional cash transfer programs. A growing number of studies therefore indicate that concerns about the use of cash transfers for alcohol and tobacco are unfounded.