Welfare Policy: Cash Versus Kind,Self-Selection and Notches

This paper investigates second-best allocations where the government lacks full information about consumer types, and how such allocations may be implemented through notch schemes. Thus, we provide another rationale for notches in addition to that investigated by Blinder and Rosen (1985). We use a model of Blackorby and Donaldson (1988), extending their results to more general preferences and to more general tax-subsidy instruments (piecewise linear, rather than linear). We argue that observed policies are sometimes of this nature: In-kind subsidies that are available only if consumption equals or exceeds a particular amount have been used in practice, in housing, and medical care.