Optimal New Energy Vehicle Production Strategy Considering Subsidy and Shortage Cost

In this paper, we present an analytical model to investigate how the optimal production strategy of new energy vehicles (NEVs) is influenced by subsidy, market fluctuation, and loss aversion. We find that a loss averse decision maker may produce more production quantity than the optimal quantity in risk neutrality under the certain conditions. We demonstrate that the expected utility is substantially influenced by subsidy, loss aversion, and the shortage cost. Although the relationship between subsidy and loss aversion is not straightforward when considering shortage cost, subsidy may play a role to regulate the possible overages and shortages in NEV manufacturing. Implications to both policy makers and practitioners are discussed. (C) 2015 The Authors. Published by Elsevier Ltd.