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Attribute-based Subsidies and Market Power: an Application to Electric Vehicles

Author

Listed:
  • Panle Jia Barwick
  • Hyuk-Soo Kwon
  • Shanjun Li

Abstract

Attribute-based subsidies (ABS) are commonly used to promote the diffusion of energy-efficient products, whose manufacturers often wield significant market power. We develop a theoretical framework for the optimal design of ABS to account for endogenous product attributes, environmental externalities, and market power. We then estimate an equilibrium model of China's vehicle market under ABS and conduct counterfactual simulations to evaluate the welfare impacts of various subsidy designs. Compared to the uniform subsidies, ABS lead to higher product quality and are more effective in mitigating quantity distortions, albeit with a modest environmental cost. Between 42% to 62% of welfare gains under ABS relative to uniform subsidies are attributed to more desirable product attributes, with the remainder explained by reductions in market power distortions. Allowing subsidy redistribution through product-level subsidies, as suggested by our theoretical model, further enhances welfare gains by an additional 34% to 62%. Among the ABS designs, China's notched subsidy design based on driving range leads to vehicle downsizing that undermines welfare benefits. Subsidies based on battery capacity, as implemented in the U.S., achieve the highest welfare gains by effectively balancing market power and environmental impacts.

Suggested Citation

  • Panle Jia Barwick & Hyuk-Soo Kwon & Shanjun Li, 2024. "Attribute-based Subsidies and Market Power: an Application to Electric Vehicles," NBER Working Papers 32264, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:32264
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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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