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Financing innovative green projects with asymmetric information and costly public funds

Author

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  • Meunier Guy

    (INRA; ALISS; Ecole Polytechnique)

  • Ponssard Jean-Pierre

    (Ecole Polytechnique)

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.

Suggested Citation

  • Meunier Guy & Ponssard Jean-Pierre, 2017. "Financing innovative green projects with asymmetric information and costly public funds," Working Papers 2017-55, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2017-55
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    References listed on IDEAS

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    Keywords

    green innovation; financing; public support; asymmetric information;
    All these keywords.

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