Subsidy Phase-Out and Consumer Demand Dynamics: Evidence from the Battery Electric Vehicle Market in China

This article quantifies the impact of the battery electric vehicle subsidy program in China. We build a structural model of dynamic demand and Bertrand Nash supply to study price elasticity and changes in production costs. The model highlights four channels through which the subsidy program impacts the market: temporal elasticity, in response to a current price change; intertemporal elasticity, in response to a future price change; and multiplication effects through peer and learning by doing. Combining these estimates, we simulate outcomes under four subsidy schemes and find a phase-out policy could be the most cost-effective while achieving higher sales promotion compared with alternative policies that provide larger subsidies over more prolonged periods.