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Output Subsidies and Quotas under Uncertainty and Firm Heterogeneity

Author

Listed:
  • Bernardo Moreno

    (Departamento de Teoria e Historia Economica, Universidad de Malaga, Spain)

  • Jose L. Torres

    (Departamento de Teoria e Historia Economica, Universidad de Malaga, Spain)

Abstract

This paper studies the relative efficiency of two kinds of regulations, quantity restrictions (quotas) and output subsidies, in an imperfectly competitive market in the presence of two sources of uncertainty, costs and prices. We find that when these two sources of uncertainty are independently distributed, the output subsidy instrument has a comparative advantage over the quantity instrument. However, when we take into account the possibility of correlation between the random components and across firms' marginal costs, we find that a positive (negative) correlation tends to favor the quantity (subsidy) instrument. Finally, we show that when the correlation is positive, it is possible to find situations in which the quantity instrument has comparative advantages over the subsidy instrument.

Suggested Citation

  • Bernardo Moreno & Jose L. Torres, 2007. "Output Subsidies and Quotas under Uncertainty and Firm Heterogeneity," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 6(2), pages 147-160, August.
    • Handle: RePEc:ijb:journl:v:6:y:2007:i:2:p:147-160
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    References listed on IDEAS

    as
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    8. Choi, Eun Kwan & Johnson, Stanley R, 1987. "Consumer's Surplus and Price Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 407-411, June.
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    More about this item

    Keywords

    cost uncertainty; demand uncertainty; firm heterogeneity; output subsidy; quota;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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