Promoting Green R&D to Allow Green Products to Outcompete Non-Green Products: Subsidize Consumers or Manufacturers?

Although green R&D is recognized as an effective approach to achieving sustainability goals, the adoption of green technology has not been ideal. As such, many governments support green R&D by subsidizing manufacturers’ green R&D or consumers’ sustainable purchases. Accordingly, we develop two theoretic models, where a manufacturer engages in green R&D to compete with a competitor who focuses on producing non-green products, and the government promotes green R&D by either (a) subsidizing consumers (Model C) or (b) subsidizing manufacturers (Model M). Our analysis reveals that the implications of subsidizing consumers and manufacturers are quite different from each other. In particular, we find that although the incentive for green R&D in Model C is always lower than that in Model M, the former scenario enables the manufacturer to benefit more from the subsidy policy. As such, we suggest that if the government cares more about how green R&D affects environmental performance, it should pay more attention to subsidizing manufacturers. However, if the government cares more about manufacturers’ profits from green products, it should subsidize consumers. Finally, it should be noted that subsidizing consumers hurts the competitor more.