There is a free lunch after all

Chun Hsiung Liao*, Yair Tauman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This paper shows that there is a simple way for a financial institution to make a positive profit, free of risk, under imperfect competition. The institution plays a very limited role. It offers firms in the industry a per-unit subsidy in return for a predetermined upfront fee. It neither produces its own output nor sells the products of the subsidized firms. In equilibrium, firms accept the offer although they end up with lower net profits. The institution makes a positive profit as it collects upfront fees which exceed its subsidy payments. The resulting outcome in a Cournot industry is welfare improvement.

Original languageEnglish
Pages (from-to)223-233
Number of pages11
JournalMathematical Social Sciences
Volume48
Issue number2
DOIs
StatePublished - Sep 2004

Funding

FundersFunder number
MOE Program for Promoting Academic Excellent of Universities91-H-FA08-1-4

    Keywords

    • Cournot model
    • Free lunch
    • Subsidy
    • Welfare improvement

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