Consumer Response to Monetary Subsidies: A Structural Demand Analysis of the Supplemental Nutrition Assistance Program

There is growing debate about whether consumer subsidies related to nutrition programs should be more flexible. Additional flexibility increases consumer welfare, but may hinder efforts towards achieving nutrition goals. We study how consumers would respond to subsidy designs with different spending restrictions. To simulate consumer behavior under different subsidies, we develop a direct utility model which integrates consumer decisions for brands, categories and stores. This model is used to simulate consumer behavior for benefit designs that are not observed in practice but are often part of the policy debate. We apply the model to study and quantify the effects of supplemental nutrition assistance program (SNAP) benefits relative to alternative subsidy designs. Our findings indicate that SNAP benefits can be effective in driving food purchases, but there are also sizable spillover effects towards other categories not covered under the program, with more than 20 percent of the used SNAP benefits going towards goods not covered under the SNAP program. To quantify the consumer welfare implications associated with alternative subsidy designs, we find that, on average, consumers would be willing to trade $1.00 in SNAP benefits for $0.58 in unrestricted cash benefits because of the spending restrictions associated with food stamps.