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Subsidizing (and taxing) business procurement

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Author Info
Asker, John
Abstract

This paper studies the effect of a subsidy (or tax) on a market where a downstream manufacturer uses a competitive tender to procure inputs from upstream suppliers. Subsidizing input production can result in input price decreases that are greater than the effective decrease in marginal costs. That is, overshifting occurs. When the size of the subsidy is not too large, the downstream firm can enjoy an increase in profits greater than the government expenditure on the subsidy. A relatively weak sufficient condition for these results to hold is that suppliers earn a positive profit margin on the marginal unit sold, before taking into account any subsidy payment. Stronger sufficient conditions, tailored to each result, are provided.

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File URL: http://www.sciencedirect.com/science/article/B6V76-4RP0MGS-1/1/0051a13ad0cd58adcfe0050602f74a3d
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Publisher Info
Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 92 (2008)
Issue (Month): 7 (July)
Pages: 1629-1643
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:eee:pubeco:v:92:y:2008:i:7:p:1629-1643

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Web page: http://www.elsevier.com/locate/inca/505578

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  1. Martin Peitz & Markus Reisinger, 2009. "Indirect Taxation in Vertical Oligopoly," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
    • Martin Peitz & Markus Reisinger, 2009. "Indirect Taxation in Vertical Oligopoly," Discussion Papers 255, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
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This page was last updated on 2009-12-3.

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