Can Rationing Increase Welfare? Theory and an Application to India’s Ration Shop System

In many developing countries, households can purchase limited quantities of goods at a fixed subsidized price through ration shops. This paper asks whether the characteristics of developing countries explain why governments use such systems. I find an equity-efficiency trade-off: an efficiency-maximizing government will never use ration shops, but a welfare-maximizing one might to redistribute and provide insurance. Welfare gains of ration shops will be highest for necessity goods and goods with high price risk. I calibrate the model for India and find that ration shops are welfare improving for three of the four goods sold through the system today. (JEL D12, H23, H25, O12)

• Publication year

  2018

• Venue

  American Economic Journal: Economic Policy

• Publication date

  2018-09-27

• Fields of study

  Business, Economics

• Identifiers
  DOI 10.1920/WP.IFS.2018.2118
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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