Industrial Policy and Market Interactions in the Electric Vehicle Transition
Paper Session
Sunday, Jan. 3, 2027 8:00 AM - 10:00 AM (EST)
- Chair: Shanjun Li, Stanford University
Equilibrium Effects in Complementary Markets: Electric Vehicle Adoption and Electricity Pricing
Abstract
The transition to electric vehicles (EVs) shifts the complementary market for passenger transport from oil to electricity. We develop and estimate a joint equilibrium model linking the German vehicle and electricity markets, emphasizing the timing of EV charging as generation costs and emissions vary intraday. A 10% EV stock raises wholesale electricity prices by about 2%, creating a sizable pecuniary externality. Time-varying tariffs shift charging to cheaper hours and spur adoption, only partially alleviating the aggregate price pressure. Time-varying tariffs sustain EV adoption when the electricity market faces higher demand or carbon costs.Supply Chain Structure and the Rise of China’s EV Industry
Abstract
This paper examines how supply chain structure contributed to the rise of China’s electric vehicle (EV) industry. Combining the universe of VAT buyer–seller matched transactions in upstream auto parts production with detailed downstream vehicle sales data, we document two defining features of China’s auto supply chain: market thickness and geographic co-location. China’s supplier base is exceptionally dense and spatially clustered around major automotive hubs, and supplier–assembler distances are substantially shorter than in North America across many component categories. These features matter economically: thicker upstream markets reduce input prices through stronger competition, better supplier selection, and improved matching, while proximity between suppliers and assemblers raises matching probability, increases transaction volume, and improves product quality, especially for more customized parts. To quantify these mechanisms, we develop and estimate a structural model that combines a bargaining model between upstream part suppliers and downstream automakers with differentiated-product Bertrand competition downstream. The model links supplier competition, input prices, and input quality to downstream vehicle pricing and demand. Counterfactual simulations imply that if China had the upstream supply chain structure of the United States, EV prices would increase by roughly 50 percent and sales would fall by about 60 percent. Overall, differences in supply chain structure can explain roughly half of the U.S.–China EV price gap. The results highlight how dense supplier networks and vertical agglomeration can generate major competitive advantages in emerging manufacturing industries.Industrial Policies for Multi-Stage Production: The Battle for Battery-Powered Vehicles
Abstract
We model a multi-stage supply chain for EVs from battery production to vehicle distribution. Given industrial policies, firms select where to open facilities at each stage. This is a difficult combinatorial choice problem that we solve with a fast mixed integer linear programming formulation. We estimate the variable and fixed costs parameters using SMM. Counterfactual simulations reveal a tension between boosting EV adoption and promoting domestic supply chains. Due to increasing returns, even unconditional subsidies raise the number of factories in the subsidizing region -- by about 16% for EVs and 7% for cells in North America, and even more in Europe. Theoretically, local assembly requirements can push down delivered marginal costs relative to unconditional subsidies. Empirically, local content requirements quadruple the expansion of cell factories in America, but they drive up costs and reduce subsidy uptake, undoing more than half of the EV adoption stimulus coming from pure buyer subsidies.Discussant(s)
Arthur van Benthem
,
University of Pennsylvania
Jonathan Elliott
,
Johns Hopkins University
Frank Pinter
,
U.S. Federal Trade Commission
Luming Chen
,
University of Michigan
JEL Classifications
- Q4 - Energy
- L5 - Regulation and Industrial Policy