Attribute-based Subsidies and Market Power: An Application to Electric Vehicles

This event is co-sponsored with the Doerr School of Sustainability.

Attribute-based subsidies are commonly used to promote the diffusion of energy-efficient products in industries with significant market power. But what can they reveal about China's electric car market? In a first-of-its-kind study, Shanjun Li and his team have developed a theoretical framework for optimal policy design that incorporates endogenous product attributes, environmental externalities, and market power in order to estimate an equilibrium model of China's vehicle market using comprehensive data to evaluate the welfare impacts of different subsidy designs. 

Their findings reveal that uniform subsidies are effective in promoting small and environmental-friendly vehicles, but exacerbate the quantity distortion from market power for high-quality products. In contrast, attribute-based subsidies (such as those based on the driving range or battery capacity) generate a larger consumer surplus by mitigating market power and improving product quality. Capacity-based subsidies are the most effective in inducing attributes valued by consumers and mitigating market power, and result in the largest welfare gain at a moderate loss of environmental benefit.

Taken together, Li will discuss how these findings highlight the importance of incorporating endogenous product-attributes and market power considerations in the design of attribute-based environmental regulations.

Download a draft of the paper "Attribute-based Subsidies and Market Power: an Application to Electric Vehicles."

About the Speaker:

Shanjun Li is a Professor of Applied Economics and Policy, and he holds the Kenneth L. Robinson Chair in the Dyson School of Applied Economics and Management at Cornell University. He serves as the Director of the Cornell Institute for China Economic Research (CICER), the Director of Graduate Studies in the Dyson School, an editor for the Journal of the Association of Environmental and Resource Economists, and a co-editor for International Journal of Industrial Organization. He also is a research associate at the National Bureau of Economic Research (NBER) and a university fellow at Resources for the Future (RFF).

Li's research focuses on pressing sustainability issues in China and their global implications in order to inform evidence-based policymaking. His recent work has centered on understanding the effectiveness and welfare impacts of various policy options to promote transportation electrification, to improve air quality, and to alleviate urban traffic congestion in China. His research has been funded by the National Science Foundation, the International Initiative for Impact Evaluation, and the World Bank among others. He has advised government agencies, NGOs, and corporations, and his research findings have been cited by such media outlets as the Economist, National Public Radio, the Associated Press, Washington Post, Forbes, the Hill, Vox, People’s Daily in China, and Daily Mail in UK.