Attribute-based Subsidies and Market Power: an Application to Electric Vehicles

Panle Barwick, Hyuk-Soo Kwon and Shanjun Li

No 32264, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Attribute-based subsidies (ABS) are commonly used to promote the diffusion of energy-efficient products, whose manufacturers often wield significant market power. We develop a theoretical framework for the optimal design of ABS to account for endogenous product attributes, environmental externalities, and market power. We then estimate an equilibrium model of China's vehicle market under ABS and conduct counterfactual simulations to evaluate the welfare impacts of various subsidy designs. Compared to the uniform subsidies, ABS lead to higher product quality and are more effective in mitigating quantity distortions, albeit with a modest environmental cost. Between 42% to 62% of welfare gains under ABS relative to uniform subsidies are attributed to more desirable product attributes, with the remainder explained by reductions in market power distortions. Allowing subsidy redistribution through product-level subsidies, as suggested by our theoretical model, further enhances welfare gains by an additional 34% to 62%. Among the ABS designs, China's notched subsidy design based on driving range leads to vehicle downsizing that undermines welfare benefits. Subsidies based on battery capacity, as implemented in the U.S., achieve the highest welfare gains by effectively balancing market power and environmental impacts.

JEL-codes: L13 L52 L62 Q58 (search for similar items in EconPapers)
Date: 2024-03
New Economics Papers: this item is included in nep-cna, nep-com, nep-ene, nep-env, nep-ind, nep-reg and nep-tre
Note: EEE IO
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