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Do Ration Shop Systems Increase Welfare? Theory and an Application to India

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  • Gadenne, Lucie

Abstract

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

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  • Gadenne, Lucie, 2018. "Do Ration Shop Systems Increase Welfare? Theory and an Application to India," Economic Research Papers 269083, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:269083
    DOI: 10.22004/ag.econ.269083
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