Subsidizing Industry Growth in a Market with Lemons: Evidence from the Chinese Electric Vehicle Market
Mrs. Jingyuan Wang
PhD Candidate
Department of Economics
Northwestern University
Consumer subsidies are common policies to foster growth in emerging green industries, such
as the electric vehicle (EV) industry. Ideally, such policies can expand the market and improve
welfare by promoting firm entry and inducing technology spillovers to related industries. However,
a poorly designed subsidy can attract “lemon” entrants with low and imperfectly observed quality,
undermining the industry’s reputation and dampening industry growth. Using Chinese EV market
data from 2012 to 2018, this paper examines how subsidies affect the growth of a nascent industry.
We develop a structural model of vehicle demand, firm entry and expansion, and EV reputation
dynamics to analyze the subsidy’s equilibrium impact. Our results suggest that the net welfare
impact of the subsidy is nearly zero and that the reputation impact reduces the subsidy benefits by
10.8%. Decreasing the subsidy level can improve policy efficiency and mitigate the reputation im-
pact, while stringency in the attribute-based subsidy can serve as a screening tool to effectively filter
out lemons. This paper develops a framework for designing green industrial policies, highlighting
the critical but often neglected role of the reputation channel.
