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Tax incidence with endogenous quality and costly bargaining: Theory and evidence from hybrid vehicle subsidies

Sumeet Gulati, Carol McAusland () and James Sallee

Journal of Public Economics, 2017, vol. 155, issue C, 93-107

Abstract: Endogenous quality and bargaining are important features of many markets but are typically omitted from studies of incidence. We develop a model with product upgrades and costly bargaining and find that tax rate pass-through only partially characterizes the welfare impact of taxation; consumers may respond to a tax or subsidy by changing product quality or by changing their bargaining effort. We apply the insights of our theory to the study of subsidies for green goods, specifically hybrid electric vehicles in Canada. We utilize highly detailed transaction data and leverage panel variation in subsidies across provinces for identification. Our baseline estimate finds that prices rises by $570 for every $1000 increase in the subsidy. But, this pass-through estimate substantially underestimates consumer gains because a majority of this price increase ($459–≈ 80%) is due to increased product quality in the form of additional options and features.

Keywords: Incidence; Bargaining; Green subsidies; Energy efficient technologies; Hybrid electric vehicles; Automobiles (search for similar items in EconPapers)
JEL-codes: H22 R48 Q48 L98 (search for similar items in EconPapers)
Date: 2017
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