Subsidizing mass adoption of electric vehicles with a risk-averse manufacturer

Abstract

This paper explores how a risk-averse electric vehicle (EV) manufacturer responds to the government’s two types of subsidy mechanism: purchase subsidy for consumers and production subsidy for the EV manufacturer. This study develops a Stackelberg framework: the government, as the leader, designs the subsidy policy to reach the EV adoption target while the risk-averse EV manufacturer, as the follower, determines the production quantity and selling price. Using an analytical model that focuses on an additive demand function, we generalize closed-form solutions and present managerial insights. Results show that the risk aversion decreases the production quantity and increases consumer surplus, however, the manufacturer’s profit does not necessarily decrease with risk aversion because the production subsidy improves profit effectively. For the government, demand uncertainty costs the government more. With regard to consumer surplus, consumers tend to benefit under the condition of demand uncertainty; however, the shortage cost hurts them. Comparing the EV manufacturer’s profit, the shortage cost and demand uncertainty decrease profit. More importantly, we assess the different effects of the two subsidies by numerical experiments. Taken the government’s subsidy expenditure and social welfare as the performance metrics, the purchase subsidy is more effective with a less risk-averse manufacturer while the production subsidy is more effective with a more risk-averse manufacturer. Therefore, this paper recommends that the government not ignore the effects of the EV manufacturer’s risk aversion and demand uncertainty when designing subsidy policies.