The double edge sword of social transfers: evidence from Ethiopia

This article examines how cash versus in-kind transfers affect local economies using Ethiopia’s Productive Safety Net Program (PSNP), Africa’s largest social protection program. Exploiting the progressive nationwide rollout and using a staggered difference-in-differences approach, I analyze impact on local prices and market adjustments from 2001-2015 to identify causal effects. Cash transfers increase local prices by 5%, while in-kind transfers show no significant average price effects. However, prices of the food items distributed fall significantly in localities receiving in-kind transfers. Effects are strongest in districts with higher treatment intensity, more isolated, and lower initial agricultural productivity. A one percentage point increase in transfer share drives a 1.02% price increase in cash-dominant districts versus a 0.82% decrease in food-dominant districts. Several mechanisms explain these differential effects: cash transfers relax supply constraints by improving agricultural productivity through increased fertilizer application, partially offsetting price inflation. Market power among suppliers and a lack of market access amplify price effects in cash-receiving areas. However, the increase in price entail welfare costs: children under five show higher rates of underweight and wasting in cash-dominant districts. These findings highlight the importance of tailoring social protection program design to local market conditions and considering transfer modality effects when scaling up interventions.