The Double-Edged Sword of Social Transfers: Evidence from Ethiopia

This article examines how cash versus in-kind transfers affect local economies. I exploit the progressive nationwide rollout of the the Ethiopia's Productive Safety Net Program (PSNP), Africa's largest social protection program, to analyze the impact of the policy on local prices and market adjustments from 2001-2015 using a staggered difference-indifferences approach. Cash transfers increase local prices by 5%, while in-kind transfers show no significant average price effects. The difference hinges on local market conditions: cash works best where markets are integrated and agricultural productivity is high, but in-kind transfers outperform cash in remote, low-productivity areas with weak market access. These effects are proportional to the intensity of the treatment. A one percentage point increase in transfer share in district expenditure drives a 0.875% price increase in cash-dominant districts versus a 0.82% decrease in food-dominant district However, the increase in price yields significant negative effects on child well-being: children under five show higher rates of underweight and wasting in cash-dominant districts. These findings highlight the importance of tailoring the design of social protection program to local market conditions and considering transfer modality effects when scaling up interventions.