Subsidy design when firms can adjust product attributes: The case of electric vehicles (Job Market Paper)

Abstract

This paper shows how subsidy design affects market outcomes in multi-product oligopolies when firms can adjust prices and product attributes. I show this in the electric vehicle (EV) market that is characterized by subsidies and falling input prices. Using novel data from Germany, I estimate an equilibrium model of demand and supply of new cars. On the supply side, firms respond to subsidies by adjusting their electric vehicles' price and driving range. I find that the marginal cost of providing range decreased by 33% from 2012 to 2018. This decrease led to more expensive EVs with a higher range and a higher markup. Conversely, a subsidy introduced in Germany led to cheaper EVs with a lower range and a lower markup. Finally, I compare different subsidy schemes and find that policymakers face a trade-off between maximizing diffusion, minimizing CO2 emissions, and distributional aspects.