Note: ROSEI is cohosting this seminar with the Department of Economics.

Title: Subsidizing Industry Growth in a Market with Lemons: Evidence from the Chinese Electric Vehicle Market

Abstract: Consumer subsidies are common policies to foster growth in emerging green industries, such as the electric vehicle (EV) industry. Ideally, such policies can expand the market and improve welfare by promoting firm entry and inducing technology spillovers to related industries. However, a poorly designed subsidy can attract “lemon” entrants with low and imperfectly observed quality, undermining the industry’s reputation and dampening industry growth. Using Chinese EV market data from 2012 to 2018, this paper examines how subsidies affect the growth of a nascent industry. We develop a structural model of vehicle demand, firm entry and expansion, and EV reputation dynamics to analyze the subsidy’s equilibrium impact. Our results suggest that the net welfare impact of the subsidy is nearly zero and that the reputation impact reduces the subsidy benefits by 10.8%. Decreasing the subsidy level can improve policy efficiency and mitigate the reputation impact, while stringency in the attribute-based subsidy can serve as a screening tool that effectively filters out lemons. This paper develops a framework for designing green industrial policies, highlighting the critical but often neglected role of the reputation channel.

Bio: Jingyuan Wang is a PhD candidate in the Department of Economics at Northwestern University. Her research focuses on industrial organization as well as environmental and energy economics, seeking to answer one broad question: How do government policies impact the clean energy transition? Her papers identify key inefficiencies associated with clean energy markets—such as environmental externalities, market power, information frictions, and policy-induced distortions—and explore policy designs that can improve efficiencies and achieve welfare-improving outcomes. Methodologically, Jingyuan studies relevant patterns in the data and estimates key primitives in consumer preferences and technology parameters. This allows her to uncover consumer and firm incentives and to investigate how policies can alter these incentives, thereby shaping market outcomes. Additionally, Jingyuan is also interested in climate change and industrial policies.