Subsidy Targeting with Market Power

Maria Polyakova and Stephen Ryan

No 26367, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Public programs frequently use observable characteristics of recipients, such as income, to target benefits. We show theoretically that when the provision of the subsidized good is decentralized to intermediaries with market power, targeting of subsidies induces a “demographic externality” that can distort the incidence and efficiency of public transfers. We examine this possibility empirically in the context of means-tested subsidies for privately-provided health insurance under the Affordable Care Act (ACA). We estimate that the overall incidence of premium subsidies on consumers in ACA Marketplaces is less than 50 percent, and a third of net government spending on premium subsidies is a deadweight loss. Market power in the presence of means-tested subsidies leads to regressive redistribution, lowering consumer surplus and rates of insurance in the poorer population targeted by subsidies. Under sufficiently high social preferences for redistribution, however, means-tested subsidies still dominate income-invariant transfers.

JEL-codes: H0 H2 H20 H21 H22 H23 H31 H41 H5 H51 I1 I10 I11 I13 I18 I38 L0 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-com, nep-hea, nep-ias, nep-pbe and nep-reg
Note: EH IO PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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