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

Ying Fan () and Ge Zhang

No 16033, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Subsidy; Price ceiling; Competition for eligibility; Cell phone (search for similar items in EconPapers)
JEL-codes: D4 H2 L1 (search for similar items in EconPapers)
Date: 2021-04
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Related works:
Journal Article: The welfare effect of a consumer subsidy with price ceilings: the case of Chinese cell phones (2022)
Working Paper: The Welfare Effect of a Consumer Subsidy with Price Ceilings: The Case of Chinese Cell Phones (2021)
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