Ration shops allow households to purchase limited quantities of certain goods at subsidised prices, and are used by governments in a numbre of low and middle income countries. In a new IFS working paper, Lucie Gadenne shows theoretically that such systems can be better for household welfare than a universal cash transfer scheme if the goods in question are consumed in relatively large quantities by the poor and if the market prices for them are volatile.
Using data from India, where ration shops are prevalent, she shows that this may be true for three of the four goods sold through the shops at the moment. However, the welfare gains would be wiped out if more than 6% of the funds allocated to the ration shops are lost to corruption or administrative costs.
Find the full working paper here.