Output subsidies and quotas under uncertainty and firm heterogeneity
AbstractThis paper studies the relative efficiency of two kinds of regulations, quantity restrictions (quotas) and output subsidies, in an imperfectly competitive market under the existence of two sources of uncertainty: uncertainty in both costs and prices. We find that when the two sources of uncertainty are independently distributed, the output subsidy instrument has comparative advantage over the quantity instrument. However, when we take into account the possibility of correlation between the random components and across firms marginal costs, we find that a positive (negative) correlation tends to favor the quantity (subsidy) instrument. Finally, we show that when the correlation is positive, it is possible to find situations in which the quantity instrument has comparative advantage over the subsidy instrument.
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Bibliographic InfoPaper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2005/24.
Length: 21 pages
Date of creation: 2005
Date of revision:
Cost uncertainty; demand uncertainty; firm heterogeneity; output subsidy and quantity instruments;
Other versions of this item:
- Bernardo Moreno & Jose L. Torres, 2007. "Output Subsidies and Quotas under Uncertainty and Firm Heterogeneity," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 6(2), pages 147-160, August.
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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