Economic Theory Seminar Series - Mitch Watt (Monash University)

Title: Topping Up and Optimal Subsidies

Abstract: We study how private market access constrains the optimal design of in-kind redistribution. A social planner redistributes through a nonlinear subsidy schedule for a consumption good, while consumers retain access to a private market—either to top up their subsidized allocations or to opt out of the government program. The form of private market access changes both the scope and the structure of optimal intervention. With topping up, subsidized marginal prices cannot exceed the private market price, so total subsidies must rise with consumption. This constraint makes subsidies poorly targeted when need is concentrated among low-demand consumers, but self-targeting when demand and need are positively correlated. With opting out, the planner can instead use private market participation as a screening device, directing low-need high-demand consumers away from the government program while supporting high-need consumers through public options and nonlinear subsidies. The results explain why real-world programs variously cap benefits, subsidize high consumption margins, provide free baselines, or restrict topping up.