January 28, 2019

Mental accounting and grocery shopping

Food stamps are designed to put food on the table. But do they work?

Franklin D. Roosevelt Presidential Library and Museum

Both sides of the aisle find reasons to criticize the food-stamp program SNAP.

Conservatives often worry that beneficiaries trade their food stamps for drugs and cash, or take advantage of quasi-legal promotions.

Liberals sometimes argue that giving recipients food stamps—instead of just cash—forces them to trade for the things they really need, making their lives and the government’s job harder than it needs to be.

Households not using food-stamp benefits for groceries could undermine SNAP’s central goal of increasing food security for low-income families.

A paper published in the December issue of the American Economic Review finds that SNAP has a larger effect on food spending than would be predicted by traditional economic theory.

Authors Justine Hastings and Jesse Shapiro show that most beneficiaries spend more on groceries than they receive in food stamps. So most recipients could simply buy the same amount of food they did before getting SNAP benefits. Then they could pocket the extra cash, without even having to trade their food stamps.

Most of that extra cash probably wouldn’t go to groceries. A household given a dollar in cash is likely to spend only about 10 cents on food, according to the authors.

“From an economic theory perspective, SNAP dollars should be equivalent to cash dollars,” Hastings said in an interview with the AEA. “And it wouldn't be necessary to have a SNAP program to increase the ability of families to put food on the table.”

But that’s theory. Watching how households actually spend their money might tell a different story.

The authors analyzed over six billion purchases, by nearly half a million households, from a large US grocery chain.

The authors examined the data when legislative changes to SNAP benefits occurred, and measured how food purchases responded. They also looked at how spending changed when households became eligible for SNAP, as well as when benefits ran out.

In all three cases, they found that a dollar of food stamps increased spending on food by roughly 50 to 60 cents.



So, for the most part, food stamps were actually used to buy food.

But this raises a deeper question: Why don’t people treat food stamps like cash, the way textbook economic theory predicts?

The authors find that a common behavior called “mental accounting” can explain their result.

“Mentally, people seem to categorize SNAP as food money,” Shapiro said in an interview with the AEA.

People tend to earmark money for different categories of spending—grocery money, rent money, beer money, and so forth.

While earmarking is a good way to budget, people tend to fixate on one category instead of looking at the budget as a whole. For example, people who gamble might spend their winnings on more lottery tickets instead of car repairs.

It can be time consuming or psychologically painful to think through every financial trade-off that a household faces.

In the context of SNAP, people add food stamps to the money they’ve already set aside for groceries. And they tend not to reconsider their overall budget once it’s set.

The lessons for policymakers may be quite broad.

If households aren't turning food stamps into cash, policymakers can adjust the program to discourage spending on unhealthy items such as candy and soda.

Furthermore, when designing stimulus packages, such as the 2009 ARRA, increasing food stamps may be better at boosting consumption than tax refunds or cash programs.

The study provides clear evidence that policymakers can use SNAP to increase food consumption.

People can and do find other ways of using food stamps. But ultimately, most food stamps are spent with food in mind.

"How Are SNAP Benefits Spent? Evidence from a Retail Panel" appears in the Fall issue of the Journal of Economic Perspectives.