Essays on a Consumer Subsidy with Firms' Bidding

Essays on a Consumer Subsidy with Firms’ Bidding Ge Zhang 2021 This dissertation evaluates a consumer subsidy program known as “Home Appliances Going to the Countryside” (HAGC). The HAGC subsidy program provided rebates to Chinese consumers from the countryside if they purchased eligible products from 2008 to 2012. This dissertation first investigates the relation between the HAGC subsidy program and the ownership and recent purchases of home appliances and electronics, using data from the China Health and Nutrition Survey. We find that households with agricultural Hukou made a larger number of purchases in the past 12 months than non-agricultural ones during the HAGC subsidy program, and we provide evidence that such a pattern is related to the subsidy rather than merely a trend for agricultural Hukou households. One interesting feature of the HAGC subsidy program is that firms competed in a bidding process to make their products eligible for the subsidy. Each participating firm proposed a list of products and a price ceiling for each product. The government evaluated the proposals and determined the set of products to be eligible for the subsidy. After the competition for subsidy eligibility, the firms must set a subsidized product’s price below its price ceiling. Such strategic competition for subsidy eligibility may put downward pressure on prices and play an essential role in shaping the welfare implication of the subsidy program. Data on the HAGC-eligible cell phones and their price ceilings are assembled from government documents, then linked to the Chinese cell phone sales data. We find that products of large or local-brand firms with large previous sales are more likely to be eligible for the subsidy while there is no clear pattern about the winning price ceilings. This dissertation conducts structural modeling and estimation to quantify and decompose the welfare effect of the HAGC subsidy program. The demand is specified by a random-coefficients discrete-choice model that allows consumers to differ in preferences and subsidy eligibility. Given the subsidized product set and the price ceilings, firms are modeled as strategically choosing prices to maximize profits subject to the constraint that they must price a subsidized product below its price ceiling. An extension to the classic estimation procedure is developed to estimate such models with multiple consumer types and binding pricing constraints. Counterfactual simulations show that the program increased the consumer and producer surpluses by 69% and 60% of the total government subsidy payment, respectively. In contrast, a hypothetical subsidy to the actual eligible products without price ceilings would make these ratios 62% and 64%. A hypothetical subsidy to all products without price ceilings would make these ratios 96% and 37%, but the total subsidy payment would be six times the actual payment and might not be financially feasible. These results indicate that the competition for subsidy eligibility benefited consumers and society while limiting the required government subsidy payments. This dissertation also addresses other aspects of the program’s policy implications. We find that the subsidy eligibility is negatively correlated with the post-program brand image for a high-end foreign brand, negatively with the number of competitors, and positively with a product model’s age. However, it has no significant correlation with the technology upgrading to 3G or smartphone. Essays on a Consumer Subsidy with Firms’ Bidding A Dissertation Presented to the Faculty of the Graduate School of Yale University in Candidacy for the Degree of Doctor of Philosophy by Ge Zhang Dissertation Directors: Steven Berry, Philip Haile June 2021 © 2021 by Ge Zhang All rights reserved.