Institute for Economic and Social Research

Jinan Lecture | Panle Jia Barwick, Cornell University

2022-05-07



Time: May 10 (Tue.), 8:00 - 9:00 pm (Beijing Time)


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


Registration Link: https://zoom.us/j/97003681805?pwd=TUYxd2QyRVI2WURkTXlyR0w4Yk1DQT09


About the Speaker:

Panle Jia Barwick is a Professor in the Department of Economics at Cornell University. Her expertise includes Industrial Organization, Applied Microeconomics, Applied Econometrics, and Chinese Economy with a strong interest in environmental economics. She serves as the Co-Director of Cornell Institute for China Economic Research (CICER). She is a faculty research associate at the National Bureau of Economic Research (NBER), an editorial board member of Journal of Urban Economics and VoxChina, editor for the Journal of Industrial Economics, and associate editor for the Rand Journal of Economics and International Journal of Industrial Organization.


Abstract:


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 environmental-friendly vehicles but exacerbate the quantity distortion from market power for high-quality products. The environmental gain from a uniform subsidy is modest relative to the 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 induce production attributes that are valued by consumers, mitigate market power, and lead 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 environmental policies.



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