Working Paper: CEPR ID: DP16033
Abstract: Subsidies to consumers may cause firms to charge higher prices, which offsets consumer benefits from subsidies. We study a subsidy program design that mitigates such price increases by making products' eligibility for a subsidy dependent on firms' commitment to price ceilings. To quantify the importance of such competition for eligibility, we develop a structural model and an estimation procedure that accommodate binding pricing constraints. We find that competition for eligibility mitigates the price increases arising from the subsidy and even leads to a reduction in prices for some products. It improves consumer and total surpluses while limiting government subsidy payments.
Keywords: subsidy; price ceiling; competition for eligibility; cell phone
JEL Codes: L1; D4; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Competition for eligibility (Z28) | Mitigates price increases due to the subsidy program (H23) |
| Competition for eligibility (Z28) | Reduction in prices for some products (P22) |
| Price ceilings (D41) | Improves consumer surplus (D11) |
| Price ceilings (D41) | Improves producer surplus (D41) |
| Competition for eligibility (Z28) | Downward pressure on prices of non-eligible products (L11) |