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Can Rationing Increase Welfare? Theory and an Application to India's Ration Shop System

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  • Lucie Gadenne

Abstract

In many developing countries, households can purchase limited quantities of goods at a fixed subsidized price through ration shops. This paper asks whether the characteristics of developing countries explain why governments use such systems. I find an equity-efficiency trade-off: an efficiency-maximizing government will never use ration shops, but a welfare-maximizing one might to redistribute and provide insurance. Welfare gains of ration shops will be highest for necessity goods and goods with high price risk. I calibrate the model for India and find that ration shops are welfare improving for three of the four goods sold through the system today.

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  • Lucie Gadenne, 2020. "Can Rationing Increase Welfare? Theory and an Application to India's Ration Shop System," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 144-177, November.
    • Handle: RePEc:aea:aejpol:v:12:y:2020:i:4:p:144-77
    DOI: 10.1257/pol.20180659
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    4. Negi, Digvijay S., 2022. "Global food price surge, in-kind transfers and household welfare: Evidence from India," World Development, Elsevier, vol. 158(C).
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    7. Digvijay S. Negi, 2022. "Global food price surge, in-kind transfers, and household welfare evidence from India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2022-006, Indira Gandhi Institute of Development Research, Mumbai, India.
    8. Diego Jimenez-Hernandez & Enrique Seira, 2022. "Should the government sell you goods? Evidence from the milk market in Mexico," Working Paper Series WP 2023-19, Federal Reserve Bank of Chicago.

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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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