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Subsidy Targeting with Market Power

Author

Listed:
  • Maria Polyakova
  • Stephen P. Ryan
Abstract
Public programs frequently use observable characteristics of recipients, such as income, to target benefits. We show theoretically that when the provision of the subsidized good is decentralized to intermediaries with market power, targeting of subsidies induces a “demographic externality” that can distort the incidence and efficiency of public transfers. We examine this possibility empirically in the context of means-tested subsidies for privately-provided health insurance under the Affordable Care Act (ACA). We estimate that the overall incidence of premium subsidies on consumers in ACA Marketplaces is less than 50 percent, and a third of net government spending on premium subsidies is a deadweight loss. Market power in the presence of means-tested subsidies leads to regressive redistribution, lowering consumer surplus and rates of insurance in the poorer population targeted by subsidies. Under sufficiently high social preferences for redistribution, however, means-tested subsidies still dominate income-invariant transfers.

Suggested Citation

  • Maria Polyakova & Stephen P. Ryan, 2019. "Subsidy Targeting with Market Power," NBER Working Papers 26367, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26367
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

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    3. Michael J. Dickstein & Kate Ho & Nathaniel Mark, 2021. "Market Segmentation and Competition in Health Insurance," Working Papers 2021-93, Princeton University. Economics Department..
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    5. O'Connell, Martin & Smith, Kate, 2020. "Corrective Tax Design and Market Power," CEPR Discussion Papers 14582, C.E.P.R. Discussion Papers.
    6. Martin O'Connell & Kate Smith, 2024. "Optimal Sin Taxation and Market Power," American Economic Journal: Applied Economics, American Economic Association, vol. 16(4), pages 34-70, October.
    7. Callejas, Jerónimo & Mohapatra, Debi Prasad, 2021. "Welfare effects of public procurement of medicines: Evidence from Ecuador," International Journal of Industrial Organization, Elsevier, vol. 75(C).
    8. Naoki Aizawa & You Suk Kim, 2020. "Public and Private Provision of Information in Market-Based Public Programs: Evidence from Advertising in Health Insurance Marketplaces," NBER Working Papers 27695, National Bureau of Economic Research, Inc.
    9. repec:hal:spmain:info:hdl:2441/4bg68glinb8r8roh0akvprtu9u is not listed on IDEAS
    10. Olivier Bahn & Mario Samano & Paul Sarkis, 2021. "Market Power and Renewables: The Effects of Ownership Transfers," The Energy Journal, , vol. 42(4), pages 195-225, July.
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    More about this item

    JEL classification:

    • H0 - Public Economics - - General
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I1 - Health, Education, and Welfare - - Health
    • I10 - Health, Education, and Welfare - - Health - - - General
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • L0 - Industrial Organization - - General

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