Subsidy Targeting with Market Power
Maria Polyakova () and
Stephen Ryan ()
No 26367, NBER Working Papers from National Bureau of Economic Research, Inc
In-kind public transfers are commonly targeted based on observable characteristics of potential recipients. This paper argues that when the subsidized good is provided by imperfectly-competitive firms, targeting can give rise to a “demographic externality,” creating unintended redistribution of surplus and distorting efficiency. We illustrate this mechanism empirically in the context of means-tested subsidies for privately-provided health insurance plans under the Affordable Care Act (ACA). Using a structural model of supply and demand, we show that market power increases the welfare loss from subsidy targeting, vis-a-vis income-invariant subsidies, by 33 percent.
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)
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