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The welfare effect of a consumer subsidy with price ceilings: the case of Chinese cell phones

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  • Ying Fan
  • Ge Zhang

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.

Suggested Citation

  • Ying Fan & Ge Zhang, 2022. "The welfare effect of a consumer subsidy with price ceilings: the case of Chinese cell phones," RAND Journal of Economics, RAND Corporation, vol. 53(2), pages 429-449, June.
    • Handle: RePEc:bla:randje:v:53:y:2022:i:2:p:429-449
    DOI: 10.1111/1756-2171.12413
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    Cited by:

    1. Lohawala, Nafisa, 2023. "Roadblock or Accelerator? The Effect of Electric Vehicle Subsidy Elimination," RFF Working Paper Series 23-13, Resources for the Future.

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    More about this item

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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