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Subsidizing (and taxing) business procurement

  • Asker, John

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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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 92 (2008)
Issue (Month): 7 (July)
Pages: 1629-1643

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Handle: RePEc:eee:pubeco:v:92:y:2008:i:7:p:1629-1643
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  14. Michael L. Katz & Harvey S. Rosen, 1983. "Tax Analysis in an Oligopoly Model," NBER Working Papers 1088, National Bureau of Economic Research, Inc.
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  17. Carbaugh Robert J & Olienyk John, 2004. "Boeing-Airbus Subsidy Dispute: A Sequel," Global Economy Journal, De Gruyter, vol. 4(2), pages 1-11, December.
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