Cash transfers and micro-enterprise performance: Theory and quasi-experimental evidence from Kenya

Theoretically, the welfare effects of cash-based assistance depend on how businesses respond to the demand shock and on resulting effects on prices. Such market effects have been largely overlooked in the literature. In this study, we examine the business and price effects of cash-based assistance to refugees in Kenya. Monthly restricted cash transfers worth 3 to 13 dollars were provided to 400,000 refugees in the form of digital money exclusively usable for food purchases at licensed shops. We show that licensed businesses have much higher revenues (+175%) and profits (+154%) and charge higher prices than unlicensed businesses. In line with theory, the restricted cash transfer program created a parallel retail market in which a limited number of businesses enjoy high market power. The theoretical and empirical results provide a cautionary tale highlighting the drawbacks of setting up a less competitive, parallel market to distribute cash-based assistance.