Research

How do government programs that distort prices in agricultural markets affect producers and consumers along the income distribution? We study the distributional effects of three such programs in Indian agricultural markets: fertilizer subsidies, procurement of crops at minimum support prices (MSP), and sale of subsidized grains to households. These interventions directly impact hundreds of millions of people and cost about 1.2% of India’s GDP. To examine their effects, we estimate a structural model of supply and demand with heterogeneous risk-averse producers, who choose a portfolio of crops and crop-specific inputs, and heterogeneous households who make consumption decisions. Using the estimated structural parameters, we solve for counterfactual equilibria in which these interventions are phased out. On the demand-side, we find these programs to be progressive. In their absence, consumption and expenditures of lower-income households would be affected more adversely. On the supply-side, we find these programs to be (weakly) regressive. Higher fertilizer prices, in the absence of subsidies, would be compensated by higher output prices so impact on farmer welfare would be minimal. Under no government-procurement at MSP, richer farmers would experience a greater welfare loss, while some of the poorest farmers would gain — a result driven partly by the inequitable implementation of the procurement program.

How do import tariffs and production subsidies, aimed at supporting a domestic industry, perform in settings with oligopolistic markets? We study this question in the context of India’s utility-scale solar sector, which comprises two connected industries: an upstream industry that produces solar panels and a downstream industry that develops solar power plants. In recent years, the Indian government has relied on both import tariffs and production subsidies to support domestic producers in the upstream solar panel industry. To empirically examine the effects of these policies, we develop a structural model of the solar sector and estimate it using data from these two industries. We derive optimal policies for three scenarios – only tariffs, only subsidies, or a mix of the two – which expand upstream domestic output to a given target level. Depending on the intended magnitude of expansion, both tariffs and subsidies can improve welfare relative to no intervention. But neither dominates the other at all levels of the target, and for a range of expansion goals, a mix of both policies yields the greatest welfare gains for the sector.

There are competing theories on whether vertical ownership is motivated by the transfer of physical inputs or the transfer of intangibles. Using administrative data on the universe of goods shipments in Karnataka, India, we show that the supply of goods along the production
chain is an important rationale for vertical integration. First, we develop and estimate a gravity model of input sourcing, and find that: (1) establishments have a strong preference for sourcing their physical inputs from suppliers within the same firm relative to other frictions such as distance and state borders, and (2) the share of within-firm trade would be near 2% absent this preference for internal suppliers. Next, we compare this to the data and find that 38% of products are sourced by establishments exclusively from within the firm when a vertically integrated supplier exists; an order of magnitude higher than our 2% benchmark. Finally, we validate that within-firm sourcing is associated with determinants of physical supply chain transaction costs such as product specificity and R&D investment.

We consider an overlapping generations economy, where parents are altruistic towards their children, and children provide old-age support to parents. We show that when the education loan market is imperfect, an education subsidy targeted towards achieving the complete-market level of education distorts fertility decisions. However, augmenting the education policy with pension support in the old-age can restore both education and fertility to complete-market level. This highlights that an Education-Pension package is more potent than perceived by the existing literature – it not only replaces the missing credit market but also corrects for fertility distortions. Our results also hold when state intervention in education is justified due to human-capital externality, instead of credit market frictions.

In presence of imperfections in the education loan market, the standard policy response of intervening solely on the education front, funded through taxes and transfers, necessarily hurts the initial working population. The literature suggests compensating them via Pay-As-You-Go (PAYG) pensions as a possible solution. We carry out the optimal policy exercise of a utilitarian government in a dynamically efficient economy with pension and education support obeying the Pareto criterion. We find that expansion of one instrument along with the other emerges as the optimal response, however, once the complete market level of education is achieved, the optimal policy suggests phasing pensions out. Eventually, government leads the economy to an equilibrium with zero pension and the Golden Rule level of education. This is achieved by exploiting only market opportunities without relying on other factors including human capital externalities, general equilibrium effects, or socio-political factors. We complement our theoretical results with a numerical exercise and compute the optimal policy path under different initial conditions and parameter values.