Events

Prof. Shanjun Li
Kenneth L. Robinson Professor of Applied Economics and Policy,
Cornell University

Attribute-based subsidies are commonly used to promote the diffusion of energy efficient products. These products are often manufactured in industries characterized by oligopolies with significant market power. We first develop a theoretical framework of attribute-based subsidies in the presence of market power. The model illustrates that the welfare impact of subsidies critically hinges on how firms choose product attributes and the resulting implications on environmental externalities and market power. We then develop and estimate an equilibrium model with endogenous product attributes using comprehensive data on China’s vehicle market. Based on model estimates, we conduct counterfactual simulations to examine the impacts of different subsidy designs. Relative to attribute-based subsidies, uniform subsidies favor small and environmentally friendly vehicles but exacerbates the quantity distortion from market power for high-quality products. The environmental gain from a uniform subsidy is modest relative to consumer welfare loss. In contrast, subsidies based on driving range, battery capacity or vehicle weight generate a large consumer surplus by improving product quality and mitigating market power. The capacity-based subsides induces production attributes that are valued by consumers, mitigates market power, and leads to the largest welfare gain at a moderate cost of environmental externalities. Our paper highlights the importance of incorporating attribute choice and market power considerations in designing attributes-based policies.