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Jingyuan Wang (Northwestern): "Subsidizing Industry Growth in a Market with Lemons: Evidence from the electric vehicle market in China"

Abstract: Consumer subsidies are common policies to foster growth in emerging green industries, such as electric vehicles (EVs). Ideally, such policies can expand the market and improve welfare by promoting firm entry and inducing technology spillovers to related industries. However, a poorly designed subsidy can attract ``lemon'' entrants with low and imperfectly observed quality, undermine the industry's reputation, and impede industry growth. Using data from the Chinese electric vehicle market from 2012 to 2018, this paper examines how subsidies affect the growth of a nascent industry. We develop a structural model of vehicle demand, firm entry and expansion, and EV collective reputation dynamics to analyze the subsidy’s equilibrium impact. Results suggest that the net welfare impact of the subsidy is nearly zero, and the reputation impact reduces subsidy benefits by 10.8%. Decreasing the subsidy level can improve policy efficiency and mitigate the reputation impact, and stringency in the attribute-based subsidy can serve as a screening tool that effectively filters lemons. This paper develops the framework for designing green industrial policies, highlighting the critical yet often neglected role of the reputation channel.