How Do Government Transfer Payments Affect Retail Prices and Welfare? Evidence from SNAP

The Supplemental Nutrition Assistance Program (SNAP) pays for around 15% ($70 billion) of US food-store consumption each year. We assess the impact of SNAP disbursements on real consumption over the Great Recession and the ensuing decade. We document the payment formula as specified in government computer codes used to audit SNAP, and use the codes to simulate how the payments would have evolved had recipient characteristics remained fixed at pre-specified levels. Using national scanner data available since 2006 and the simulated instrument, we estimate that a 1% increase in SNAP benefits per population led to a persistent 0.08% increase in grocery prices. We verify long and flat pre-trends, sharp timing, and stronger effects in counties where the recipient share of the population is larger. Estimates of marginal propensities to consume food (MPCF) support past findings. We develop and calibrate a partial equilibrium model, both to test the consistency of the findings with theory and to interpret the results. A marginal dollar of benefits raises the recipient’s consumer surplus from groceries by $0.7, producer surplus by $0.5, and lowers each non-SNAP consumer’s surplus by $0.06, because of the large MPCF out of SNAP, low elasticities of demand, and market power. If the objective of SNAP is to guarantee the intended floor of real spending power on food, federal maximum benefits should be increased by 10% to account for the price response.