Subsidizing Fuel Efficient Cars: Evidence from China's Automobile Industry

Chia-Wen Chen, Wei-Min Hu, and Christopher R. Knittel

January 2018

We examine 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, we find that the program boosted sales for subsidized vehicle models, but that the program also created a substitution effect within highly fuel efficient vehicles. Using the framework in Boomhower and Davis (2014), we show 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.

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