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Product Homogeneity, Knowledge Spillovers, and Innovation: Why Energy Sector is Perplexed by a Slow Pace of Technological Progress

Wei Jin () and ZhongXiang Zhang ()
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Wei Jin: School of Public Policy, Zhejiang University

CCEP Working Papers from Centre for Climate & Energy Policy, Crawford School of Public Policy, The Australian National University

Abstract: There is a growing body of literature mentioning the slow pace of energy technological progress as compared to other technologies like information technology (IT), but the reasons why energy sector is perplexed by slow innovation remain unexplained. Based on a variety-expanding endogenous technological change model, this paper provides a rigorous economic exposition of the mechanism that underlies the slow progress of energy technological innovation. We show that in decentralized market equilibrium the growth rate of energy technology variety is lower than that of IT variety. This stems from both market fundamentals where the homogeneity of end-use energy goods is less likely to harness the pecuniary externality embedded in the household's love-for-variety preference, and technology fundamentals where the capital-intensiveness of energy technology inhibits the non-pecuniary technological externality due to knowledge spillovers. We further show that a social planner solution can promote energy technological progress, yet still cannot achieve an outcome in which energy technology variety grows faster than IT variety. By targeting subsidies on energy technology R&D and the use of intermediate primary energy inputs by secondary energy producers, the decentralized market equilibrium can achieve an outcome in which energy technology grows faster than IT.

Keywords: energy technological innovation; product homogeneity; knowledge spillovers; love-for-variety effect (search for similar items in EconPapers)
JEL-codes: O31 Q41 Q43 Q48 Q55 Q58 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-ene, nep-gro, nep-ino and nep-tra
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