Financing innovative green projects with asymmetric information and costly public funds

Guy Meunier and Jean-Pierre Ponssard

No 2017-55, Working Papers from Center for Research in Economics and Statistics

Abstract: The energy transition requires the deployment of significant programs in research and development. In absence of a long term commitment by governments on an international price of carbon various forms of national subsidies have been used. This paper analyzes the potential benefit of using subsidies conditional on success or failure of an R&D program, rather than a flat subsidy. The relationship between the state and the firm is formalized in the principal agent framework. Three potential sources of inefficiency are identified: conditions of observability of the outcome of the project, adverse selection regarding the probability of success and moral hazard. We shall show how subsidies that reward failure and subsidies that reward success mitigate these respective sources of inefficiency in a superior way as compared to flat subsidies. The gap between our second best policies and the first best is also identified. We bring together our analytical results and offer some guidance for the design of contractual investment programs such as the contractual instruments used in the Investment Program for the Future (Programme d’Investissements d’Avenir) launched in France in 2010 to promote R&D for the energy transition over the period 2010-2020.

Keywords: green innovation; financing; public support; asymmetric information (search for similar items in EconPapers)
Pages: 39 pages
Date: 2017-10-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-ppm
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