A Subsidy That Is Inversely Related to the Product Price

Takahiko Kiso* (Corresponding Author)

*Corresponding author for this work

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This study considers a new subsidy design to support the purchase or production of target products. Under the proposed design, subsidy payments are inversely related to product prices. Compared to ‘flat’ subsidies, this design reduces producers’ market power and the subsidy benefits passed on to them, improving the cost-effectiveness of government spending (by up to 50% according to simulations based on an actual subsidy programme). Additionally, this subsidy’s cost-effectiveness and incidence can be adjusted flexibly by changing the policy parameters. Finally, the subsidy design can be modified to provide larger payments to higher-quality products, thereby offsetting disincentives for quality improvement.
Original languageEnglish
Pages (from-to)2173–2206
Number of pages34
JournalEconomic Journal
Issue number646
Early online date10 Jan 2022
Publication statusPublished - 1 Aug 2022

Bibliographical note

Open Access under the OUP Agreement


  • IR subsidy
  • cost-effectiveness
  • incidence
  • imperfect competition
  • supermodular games


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