Green industrial policy, information asymmetry and repayable advance

Guy Meunier and Jean-Pierre Ponssard

No 2023.04, Working Papers from FAERE - French Association of Environmental and Resource Economists

Abstract: The energy transition requires the deployment of risky research and development (R&D) programs, most of which are partially financed by public funding. Recent recovery plans, associated with the COVID-19 pandemic and the energy transition, increased the funding available to finance innovative low-carbon projects and call for an economic evaluation of their allocation. This paper analyzes the potential benefit of using repayable advance: a lump-sum payment to finance the project that is paid back in case of success. The relationship between the state and innovative firms is formalized in the principal agent framework. Investing in an innovative project requires an initial observable capital outlay. We introduce asymmetric information on the probability of success, which is known to the firm but not to the state agency. The outcome of the project, if successful, delivers a private benefit to the firm and an external social benefit to the state. In this context a repayable advance consists in rewarding failure. We prove that it is a superior strategy in the presence of pure adverse selection. We investigate under what conditions this result could be extended in the presence of moral hazard. Implications for green industrial policy are discussed.

Keywords: green innovation; public financing; information structure; conditional schemes (search for similar items in EconPapers)
JEL-codes: D25 D82 H25 O38 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2023-07
New Economics Papers: this item is included in nep-ene, nep-env and nep-ppm
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http://faere.fr/pub/WorkingPapers/Meunier_Ponssard_FAERE_WP2023.04.pdf First version, 2019 (application/pdf)

Related works:
Journal Article: Green industrial policy, information asymmetry, and repayable advance (2024)
Working Paper: Green industrial policy, information asymmetry, and repayable advance (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fae:wpaper:2023.04

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