Optimal Grants and Subsidies for Development Supply Chains: Case of Solar Lanterns in Haiti

37 Pages Posted: 31 Oct 2017

See all articles by James Knuckles

James Knuckles

City University London - Sir John Cass Business School

ManMohan S. Sodhi

City University London - Sir John Cass Business School

Christopher S. Tang

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area

Jiayi Joey Yu

Fudan University - School of Management

Date Written: September 26, 2017

Abstract

Problem definition: In supply chains for subsidised products sold to low income families, there is a question about who should be subsidised in the supply chain and to what extent, and whether retail competition or having substitutable products matters.

Academic/practical relevance: By introducing and analyzing “development supply chains” in which transactions are commercial but grants and subsidies are needed for affordability, we show that donors such as USAID or World Bank need to understand and exploit supply chain structure, including retail competition and product subsitutability.

Methodology: We develop stylised models to analyse optimal grants and subsidies for a three-echelon supply chain of manufacturers, retailers and consumers. Successive models focus on manufacturers and grants, and on retailers and consumers, adding substitutable products and competition in retail.

Results: A “lump-sum” grant enables the donor to generate an indirect incentive for the manufacturer to make R&D investment to reduce its own unit cost and a direct incentive to reduce its wholesale price for retailers. The donor can subsidize either the retailer or the customer, and the total subsidy per unit has an optimal level. Having choice between a more preferred and a less preferred substitutable product can increase the number of beneficiaries. Subsidizing competing retailers can increase the number of beneficiaries although at the expense of reduced margins (but higher units sold). In all cases, margins for the retailer echelon remain positive, supporting the “development” goal.

Managerial implications: Donors must coordinate within different programmes along the entire supply chain. They must encourage substitutable products with support for higher quality, higher cost products as well as retail competition. Unit subsidies to the retailer, micro-entrepreneur, or customer are economically equivalent, so transaction costs should drive the decision for where to subsidise the supply chain.

Keywords: Subsidies, Development Supply Chains, Haiti, Socially Responsible Products, Solar Lanterns

JEL Classification: O19, Q01

Suggested Citation

Knuckles, James and Sodhi, ManMohan S. and Tang, Christopher S. and Yu, Jiayi, Optimal Grants and Subsidies for Development Supply Chains: Case of Solar Lanterns in Haiti (September 26, 2017). Available at SSRN: https://ssrn.com/abstract=3060590 or http://dx.doi.org/10.2139/ssrn.3060590

James Knuckles

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ManMohan S. Sodhi (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Christopher S. Tang

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/x980.xml

Jiayi Yu

Fudan University - School of Management ( email )

670 Guoshun Road
Shanghai, Shanghai 200433
China

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