Improving Consumer Welfare and Manufacturer Profit via Government Subsidy Programs: Subsidizing Consumers or Manufacturers?

52 Pages Posted: 12 Oct 2016 Last revised: 2 Sep 2017

See all articles by Jiayi Joey Yu

Jiayi Joey Yu

Fudan University - School of Management

Christopher S. Tang

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area

Zuo-Jun Max Shen

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR)

Date Written: August 31, 2017

Abstract

Most consumers in rural areas of many developing countries cannot afford to purchase certain livelihood improvement products such as home appliances. To improve consumer welfare and manufacturer profit, many governments launch different types of subsidy programs that offer subsidies to consumers, manufacturers, or both. Motivated by a subsidy program developed by the Chinese government in 2007, we present a parsimonious model to determine the optimal subsidy program in different settings so as to gain a better understanding about the conditions under which it is optimal for the government to subsidize consumers only, manufacturers only, or both. Our analysis reveals that the structure of the optimal subsidy program (i.e., subsidize consumers only, manufacturers only, or both) depends on: (a) whether there is a well-established market selling price for the products; and (b) the relative emphasis that the government places on consumer welfare versus manufacturer profit. Also, we find that government can improve consumer welfare by developing subsidy programs that involve multiple (competing) manufacturers with different market sizes and adequate capacities. Moreover, when using an earmarked budget to develop a subsidy program that is intended to improve social welfare (manufacturer profit and consumer welfare), we find that it is more effective for the government to subsidize consumers only. Our findings provide insights for developing effective government subsidy programs.

Keywords: Developing Economies, Government Subsidies, Economic Development, Social Welfare

JEL Classification: O38, O35

Suggested Citation

Yu, Jiayi and Tang, Christopher S. and Shen, Zuo-Jun Max, Improving Consumer Welfare and Manufacturer Profit via Government Subsidy Programs: Subsidizing Consumers or Manufacturers? (August 31, 2017). Available at SSRN: https://ssrn.com/abstract=2851293 or http://dx.doi.org/10.2139/ssrn.2851293

Jiayi Yu (Contact Author)

Fudan University - School of Management ( email )

670 Guoshun Road
Shanghai, Shanghai 200433
China

Christopher S. Tang

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/x980.xml

Zuo-Jun Max Shen

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR) ( email )

IEOR Department
4135 Etcheverry Hall
Berkeley, CA 94720
United States

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