A Subsidy That Is Inversely Related to the Product Price

Takahiko Kiso* (Corresponding Author)

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This study considers a new subsidy design to support the purchase or production of target products. Under the proposed design, subsidy payments are inversely related to product prices. Compared to ‘flat’ subsidies, this design reduces producers’ market power and the subsidy benefits passed on to them, improving the cost-effectiveness of government spending (by up to 50% according to simulations based on an actual subsidy programme). Additionally, this subsidy’s cost-effectiveness and incidence can be adjusted flexibly by changing the policy parameters. Finally, the subsidy design can be modified to provide larger payments to higher-quality products, thereby offsetting disincentives for quality improvement.
Original languageEnglish
JournalEconomic Journal
Publication statusAccepted/In press - 3 Jan 2022

Keywords

  • IR subsidy
  • cost-effectiveness
  • incidence
  • imperfect competition
  • supermodular games

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