On the Effectiveness of Uniform Subsidies in Increasing Market Consumption
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Author(s)
Levi, Retsef
Perakis, Georgia
Romero, Gonzalo (Gonzalo Ignacio Romero Yáñez)
Date Issued
January 2017
Journal
Management Science
Publisher
Institute for Operations Research and the Management Sciences (INFORMS)
Citation
Levi, Retsef et al. “On the Effectiveness of Uniform Subsidies in Increasing Market Consumption.” Management Science 63, 1 (January 2017): 40–57. © 2017 INFORMS
Version
Author's final manuscript
Abstract
We study the problem faced by a central planner trying to increase the consumption of a good, such as new malaria drugs in Africa. The central planner allocates subsidies to its producers, subject to a budget constraint and endogenous market response. The policy most commonly implemented in practical applications of this problem is uniform, in the sense that it allocates the same per-unit subsidy to every firm, primarily because of its simplicity and perceived fairness. Surprisingly, we identify sufficient conditions of the firms' marginal costs such that uniform subsidies are optimal, even if the firms' efficiency levels are arbitrarily different. Moreover, this insight is usually preserved even if the central planner is uncertain about the specific market conditions. Further in many cases, uniform subsidies simultaneously attain the best social welfare solution. Additionally, simulation results in relevant settings where uniform subsidies are not optimal suggest that they induce a nearly optimal market consumption. On the other hand, if the firms face a fixed cost of entry to the market, then the performance of uniform subsidies can be significantly worse, suggesting the need for an alternative policy in this setup.
MIT Department
Sloan School of Management
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Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.1287/MNSC.2015.2329
