DP16033 The Welfare Effect of a Consumer Subsidy with Price Ceilings: The Case of Chinese Cell Phones
|Author(s):||Ying Fan, Ge Zhang|
|Publication Date:||April 2021|
|Keyword(s):||cell phone, competition for eligibility, Price ceiling, Subsidy|
|JEL(s):||D4, H2, L1|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16033|
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.