The Welfare Effect of a Consumer Subsidy with Price Ceilings: The Case of Chinese Cell Phones

27 Pages Posted: 12 Apr 2021 Last revised: 23 Apr 2023

See all articles by Ying Fan

Ying Fan

University of Michigan

Ge Zhang

Yale University

Multiple version iconThere are 2 versions of this paper

Date Written: April 2021

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

Fan, Ying and Zhang, Ge, The Welfare Effect of a Consumer Subsidy with Price Ceilings: The Case of Chinese Cell Phones (April 2021). NBER Working Paper No. w28659, Available at SSRN: https://ssrn.com/abstract=3824535

Ying Fan (Contact Author)

University of Michigan ( email )

611 Tappan Street
Lorch Hall, Rm 308
Ann Arbor, MI 48109-1220
United States

HOME PAGE: http://www-personal.umich.edu/~yingfan/

Ge Zhang

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

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