This paper examines the response of vehicle purchase behavior to China's largest national subsidy program for fuel-efficient vehicles during 2010 and 2011. Using variation from the program's eligibility cutoffs and the rollout of the subsidy program, the program is found to boost sales for subsidized vehicle models, but also to create a substitution effect within highly fuel-efficient vehicles. Estimates imply that ignoring the substitution effect would lead one to conclude that the program is welfare enhancing, whereas in fact the marginal cost of the program exceeds the marginal benefit by as much as 300 percent.
Chen, Chia-Wen, Wei-Min Hu, and Christopher R. Knittel.
"Subsidizing Fuel-Efficient Cars: Evidence from China's Automobile Industry."
American Economic Journal: Economic Policy,
Consumer Economics: Empirical Analysis
Business Taxes and Subsidies including sales and value-added (VAT)
Firm Performance: Size, Diversification, and Scope
Automobiles; Other Transportation Equipment; Related Parts and Equipment
Industrialization; Manufacturing and Service Industries; Choice of Technology
Socialist Systems and Transitional Economies: Factor and Product Markets; Industry Studies; Population
Socialist Institutions and Their Transitions: Consumer Economics; Health; Education and Training: Welfare, Income, Wealth, and Poverty