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Do Ration Shop Systems Increase Welfare? Theory and an Application to India

Do Ration Shop Systems Increase Welfare? Theory and an Application to India

358/2018 Lucie Gadenne
working papers,culture and development
American Economic Journal: Economic Policy
https://www.aeaweb.org/articles?id=10.1257/pol.20180659&&from=f

358/2018 Lucie Gadenne

In many developing countries households can purchase limited quantities of goods at a fixed subsidized price through ration shops. This paper asks whether these countries’ characteristics justify the use of such ration shop 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 from introducing ration shops are highest for necessity goods with high price risk. I calibrate the model for India and find that ration shops are indeed welfare-improving for three of the four goods sold through the system today.

Culture and development

American Economic Journal: Economic Policy

https://www.aeaweb.org/articles?id=10.1257/pol.20180659&&from=f