Technology Category
Game Theory and Economic Paradigms: ApplicationsApplication Domains: Humanities & Computational Social ScienceSearch and Optimization: Applications
Price Cap vs. Per-Unit Subsidies: Selection, Pricing, and Cross Subsidization
🤖 AI Summary
This study examines cross-subsidization arising from weak cost-containment incentives and joint applications in the U.S. Federal Communications Commission’s Rural Health Care subsidy program. Combining a theoretical model with comprehensive administrative data, the authors employ an extended two-way fixed effects framework to accommodate continuous treatment variables and identify the impacts of price caps and ad valorem subsidies on institutional behavior and program expenditures. The analysis reveals that ad valorem subsidies significantly reduce program spending and improve cost incentives, whereas joint applications generate substantial cross-subsidization, leading to higher total expenditures. Moreover, enforcement intensity exhibits an inverted U-shaped relationship with cross-subsidization, further corroborating the proposed mechanism. This work provides the first evidence of a novel distortion induced by joint applications under ad valorem subsidies, offering both theoretical insights and empirical guidance for the design of public subsidy programs.
Technology Category
Application Category
📝 Abstract
We evaluate subsidy mechanisms in the FCC's Rural Health Care program using administrative data covering the full population of participants. The original price-cap mechanism removes cost-containment incentives for health care providers. An ad valorem mechanism introduced in 2014 addresses this flaw by making providers bear 35% of costs. However, allowing consortium applications creates a new distortion: cross-subsidization from eligible to ineligible members. We develop theoretical models predicting these effects and estimate treatment effects using an extension of the two-way fixed effects framework with continuous treatments. We find that the ad valorem mechanism substantially reduces program spending relative to the price cap, while the consortium option significantly inflates it. Enforcement records and an inverted U-shaped relationship between cross-subsidization intensity and ineligible member share corroborate the findings.
Problem
Research questions and friction points this paper is trying to address.
subsidy mechanisms
price cap
ad valorem subsidies
cross-subsidization
cost-containment incentives
Innovation
Methods, ideas, or system contributions that make the work stand out.
continuous treatment
two-way fixed effects extension
cross-subsidization
ad valorem subsidy
price-cap regulation
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2024-07-30arXiv.orgCitations: 0
