Near-Optimality of Uniform Copayments for Subsidies and Taxes Allocation Problems
Name
Levi_JN_2018_Near_Optimality_of_Uniform_Co_payments_Webpage.pdf
Description
Accepted version
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535.96 KB
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Adobe PDF
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33aaa390fb6cc257b9b6c1aeb4f60a8d
Author(s)
Levi, Retsef
Perakis, Georgia
Romero, Gonzalo
Date Issued
March 2019
Journal
Operations Research
Publisher
Institute for Operations Research and the Management Sciences (INFORMS)
Citation
Levi, Retsef et al. "Near-Optimality of Uniform Copayments for Subsidies and Taxes Allocation Problems." Operations Research 67, 2 (March-April 2019): 295-358. © 2019 INFORMS
Version
Author's final manuscript
Abstract
We study a subsidies and taxes allocation problem with endogenous market response subject to a budget constraint. The central planner’s objective is to maximize the consumption of a good, and she allocates per-unit copayments and taxes to its producers. We show that the optimal policy taxes the more efficient firms and allocates larger copayments to less efficient firms, making it impractical. Therefore, we consider the simple and frequently implemented policy that allocates the same copayment to each firm, known as uniform copayments, and provide the first worst-case performance guarantees for it. Namely, we show that uniform copayments are guaranteed to induce a significant fraction of the consumption induced by the optimal policy in small markets for price-taking (Cournot) producers with affine increasing marginal costs facing any nonincreasing (linear) inverse demand function, even for different firms’ efficiency levels. Moreover, compared with the best policy that allocates copayments only, uniform copayments induce at least one-half of the optimal consumption. Furthermore, for Cournot competition with linear demand and constant marginal costs, the latter guarantee increases to more than 85% of the optimal consumption. Our results suggest that uniform copayments are surprisingly powerful in increasing the market consumption of a good.
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/OPRE.2018.1785
