The Effects of a Government’s Subsidy Program: Accessibility beyond Affordability

Management Science, Forthcoming

47 Pages Posted: 29 Apr 2019 Last revised: 1 May 2019

See all articles by Ping Xiao

Ping Xiao

Deakin University - Faculty of Business and Law

Ruli Xiao

Indiana University

Yitian (Sky) Liang

Tsinghua University - School of Economics and Management

Xinlei Chen

University of British Columbia (UBC) - Sauder School of Business

Wei Lu

University of Science and Technology of China (USTC) - School of Management

Date Written: February 28, 2019

Abstract

Rural consumers may face not only the challenge of affordability but also the problem of limited accessibility. Can a government’s subsidy program effectively address these issues? This paper examines the impact of a large-scale subsidy program, “Household Electrical Appliances Going to the Countryside,” offered by the Chinese government. The government regulation imposes price subsidy combined with price ceiling on products in the program. We consider two effects of the subsidy: lowering the retail price to make the product more affordable to consumers and encouraging manufacturers to expand their distribution coverage to make products more accessible to consumers. We build a dynamic model of oligopoly to study how firms adjust their distribution coverage. Conditional on the model estimates, we evaluate the program’s effects on social welfare, consumer surplus, and firms’ market performance and marketing channel decisions through counterfactual analyses. We find that the subsidy program increases social welfare by CNY¥ 0.209 billion, as a result of a subsidy expense of CNY¥ 0.236 billion. When breaking down the impact, we find it increases consumer surplus by CNY¥ 0.184 billion (50%), manufacturers’ profits by CNY¥ 0.125 billion (53%) and manufacturers’ payoff by CNY¥ 2.5 million (17%). Specifically, 14% (13.2%) of the consumer surplus (firm profit) increase are from changes in distribution coverage, and the rest is from the subsidy (price changes). The program’s return of investment (i.e., social welfare minus subsidy expense), which is negative, however, could be improved by applying a relatively lower subsidy rate.

Keywords: distribution coverage expansion, dynamic games, subsidy program, adjustment costs, hassle costs

Suggested Citation

Xiao, Ping and Xiao, Ruli and Liang, Yitian (Sky) and Chen, Xinlei and Lu, Wei, The Effects of a Government’s Subsidy Program: Accessibility beyond Affordability (February 28, 2019). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3368107 or http://dx.doi.org/10.2139/ssrn.3368107

Ping Xiao (Contact Author)

Deakin University - Faculty of Business and Law ( email )

Burwood, Victoria 3215
Australia

Ruli Xiao

Indiana University ( email )

100 S Woodlawn Ave
Bloomington, IN 47405
United States

HOME PAGE: http://https://sites.google.com/site/iueconomicsrulixiao/

Yitian (Sky) Liang

Tsinghua University - School of Economics and Management ( email )

Wei Lun Building 543
Tsinghua University
Beijing, 100084
China

Xinlei Chen

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Wei Lu

University of Science and Technology of China (USTC) - School of Management

China

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