Abstract:
We study a nationwide welfare program in Mexico in which the government, in an effort to eliminate hunger, sells milk to households at subsidized rates via a network of thousands of specialized "ration stores." Such direct provision programs, which exist in many countries, often appear puzzling to economists, as it seems unlikely that the government would have any comparative advantage relative to the private market in procuring and distributing milk. To understand direct provision, we formulate and estimate an equilibrium model of the milk market, and use it to compare this program with natural (budget-neutral) alternatives such as milk vouchers or unrestricted cash transfers. Using rich household-level panel data and the variation generated by the staggered entry of new government stores, we show that market power by private milk suppliers is an important concern, and that government-sold and privately-sold milk are close (though imperfect) substitutes. Consequently, direct provision plays an important role in the milk market in Mexico by disciplining private-milk prices. Indeed, our results suggest that, in the absence of government milk, private market prices would be 3% higher, and that direct provision generates consumer welfare gains of 4% relative to milk vouchers and 2% relative to unrestricted cash transfers.

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