Stakeholder perspectives on government subsidy programs: Trade‐in subsidy, consumption subsidy, or mixed subsidy?

Abstract

Many governments worldwide offer various types of consumer‐specific subsidy programs, such as a trade‐in subsidy (TS) program that targets existing consumers only, a consumption subsidy (CS) program that covers both new and existing consumers with undifferentiated subsidy levels, or a mixed subsidy (MS) program that targets the two consumer segments with differentiated subsidy levels. However, which program is more beneficial to social welfare and other stakeholders is largely unknown. In this paper, we establish a game‐theoretic model to explore the impacts of these subsidy programs on different stakeholders (i.e., the firm, consumers, the environment, and social welfare). Interestingly, we uncover that the TS and MS programs have equal effectiveness in stimulating demand (collecting old products) from existing consumers, whereas the CS and MS programs have relative advantages in expanding the total demand from both new and existing consumers. We further find that (i) when product durability is low, the flexible MS scheme can lead to a quadruple‐win for all stakeholders, (ii) when product durability is moderate, the MS scheme is better for social welfare and the environment, whereas the CS scheme benefits the firm and consumers more, and (iii) when product durability is high, the MS scheme can achieve a triple‐win for the firm, consumers, and social welfare, whereas the CS scheme is better for the environment. Moreover, we identify the differential impacts of each program on different stakeholders when considering that the earmarked subsidy is limited and a secondary market exists. Our findings not only shed light on why the TS, CS, and MS programs are all likely to be adopted in practice but also provide helpful guidelines for governments aiming to offer a more effective subsidy program.