Can Rationing Increase Welfare? Theory and an Application to India's Ration Shop System
- American Economic Journal: Economic Policy (Forthcoming)
In many developing countries households can purchase limited
quantities of good 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
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