EconPapers    
Economics at your fingertips  
 

A CLASS OF PERFORMANCE-BASED SUBSIDY RULES

Hassan Benchekroun () and Ngo Long

Departmental Working Papers from McGill University, Department of Economics

Abstract: We consider a benchmark static incentive scheme, i.e. a per unit subsidy, that induces a monopoly to produce a target output level. We show that the same output level can be achieved by a continuum of dynamic subsidy rules based on a performance indicator. The subsidy rules require only local information. The present value of the subsidies paid under anyone of our dynamic schemes is smaller than the amount paid under the static subsidy. Moreover, each of the dynamic subsidy rules results, at each moment, in a lower per unit subsidy than the static subsidy. The subsidy rate depends on a state variable that reflects the monopolist's history of performance. This variable depreciates over time, therefore requiring a permanent effort of the monopolist to maintain it at an optimal level. In an example with a linear demand, the subsidy costs of inducing efficiency are reduced by almost fifty per cent.We show that the cost of sorting and the network effects jointly determine the rate of participation of consumers in the process of recycling. The dominant producer of virgin material takes into account the recycling activities when it makes its pricing decision. The network effects can create multiplicity of steady-state equilibria. The government can improve welfare by influencing equilibrium selection.

JEL-codes: C61 D42 D92 H21 L5 (search for similar items in EconPapers)
Date: 2007-05
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://home.mcgill.ca/files/economics/aclassof.pdf (application/pdf)

Related works:
Journal Article: A CLASS OF PERFORMANCE‐BASED SUBSIDY RULES* (2008) Downloads
Working Paper: Designing a Performance Indicator to Economize on Monopoly Subsidy (2004) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mcl:mclwop:2007-05

Access Statistics for this paper

More papers in Departmental Working Papers from McGill University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Shama Rangwala (). This e-mail address is bad, please contact .

 
Page updated 2019-06-20
Handle: RePEc:mcl:mclwop:2007-05