Subsidies for green technology adoption under uncertain demand and incomplete information

Shiyuan Zheng, Changmin Jiang, Xiaowen Fu, Ying-En Ge and Jia Shu

Omega, 2022, vol. 112, issue C

Abstract: In order to encourage manufacturers to replace traditional high-emission equipment with new ones powered by green technology, alternative regulations, notably equipment subsidy policy (ESP) and operation subsidy policy (OSP), have been proposed to align manufacturers’ decisions with governments’ objectives. This study investigates manufacturers’ timing decisions to adopt green technology under ESP and OSP. In our study the market demand is dynamically stochastic, and the certain demand promotion is observable only by the manufacturer and can be promoted by inserting costly effort. A principal-agent model is developed in which the regulation on the adoption timing is specified as a call option exercised by the government and constrained by the manufacturer's incentive compatibility (IC), participation constraint (PC), ex ante IC, and ex ante PC. We find that the optimal subsidy policies exhibit stepwise structures, which depend solely on the demand promotion under complete information, and on the demand promotion as well as the manufacturer's effort cost under incomplete information. The optimal ESP and OSP are equivalent under complete information. Under incomplete information, these two policies lead to the same adoption timing if the demand is high, although ESP may require a larger subsidy budget. Otherwise, ESP promotes earlier adoption than OSP.

Keywords: Green technology adoption timing; Subsidy policies; Uncertainty; Incomplete information; Real options; Principal-agent (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0305048322000822
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jomega:v:112:y:2022:i:c:s0305048322000822

Ordering information: This journal article can be ordered from
http://www.elsevier.com/wps/find/supportfaq.cws_home/regional
https://shop.elsevie ... _01_ooc_1&version=01

DOI: 10.1016/j.omega.2022.102675

Access Statistics for this article

Omega is currently edited by B. Lev

More articles in Omega from Elsevier
Bibliographic data for series maintained by Catherine Liu ().