Effects of Subsidy Cancellations on Investment Strategies of Local Governments and New Energy Vehicle Manufacturers: A Study Based on Differential Game

Abstract

The intensity of China’s new energy vehicle (NEV) subsidies has gradually declined since 2017 and is expected to end in the next few years, thereby causing market fluctuations and affecting the investment strategies of both local governments and automotive enterprises. In order to examine the effects of a subsidy cancellation, this study introduced it as an external disturbance to establish a differential game model, in which a random arrival process is used to represent the occurrence of a cancellation. The model incorporated both decentralized and centralized modes at the pre- and post-subsidy cancellation stages. A numerical simulation showed that the investments of both parties, the market demand, and the system benefits in both modes would be lower when compared to the scenario in which the subsidy is not canceled, but continued. The performance of the centralized mode was superior to that of the decentralized one, implying that the centralized mode was capable of realizing Pareto optimality. A sensitivity analysis of the model’s parameters showed that the timing of the subsidy cancellation would not affect the investment levels of either party in either stage, but losses of market demand and system benefits would occur shortly after the cancellation and continue until stabilizing.