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Do Ration Shop Systems Increase Welfare? Theory and an Application to India

Lucie Gadenne ()

CAGE Online Working Paper Series from Competitive Advantage in the Global Economy (CAGE)

Abstract: In many developing countries households can purchase limited quantities of goods at a fixed subsidized price through ration shops. This paper asks whether these countries’ characteristics justify the use of such ration shop systems. I find an equity-efficiency trade-off: an efficiency-maximizing government will never use ration shops but a welfare-maximizing one might, to redistribute and provide insurance. Welfare gains from introducing ration shops are highest for necessity goods with high price risk. I calibrate the model for India and find that ration shops are indeed welfare-improving for three of the four goods sold through the system today.Keywords: JEL Classification:

Date: 2018
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