Auctioning green investment grants as a means of accelerating environmental innovation - article ; n°1 ; vol.83, pg 99-110

Cesare Dosi, Michèle Moretto

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Revue d'économie industrielle - Année 1998 - Volume 83 - Numéro 1 - Pages 99-110
Outre les incertitudes relatives aux bénéfices privés, l'abandon volontaire d'une technologie polluante peut être ultérieurement retardé par la perspective d'une réduction des coûts d'investissement liée à la diffusion du nouveau mode de production. Dans cet article, seront analysées les implications de ces sources d'inertie sur la conception d'aides publiques à l'investissement ayant pour but d'accélérer l'adoption de technologies vertes. Bien que la perspective d'une réduction des coûts d'investissement tende à ralentir le changement technologique spontané, il sera montré que l'existence d'effets externes positifs, liés à la diffusion du nouveau mode de production, offre au régulateur la possibilité de réduire les dépenses publiques en octroyant les subventions aux entreprises ayant des coûts inférieurs d'innovation, au lieu de subventionner, sans discrimination, tout le secteur concerné.
Besicles uncertainty about on-going private benefits, voluntary abandonment of a polluting technology may be (further) delayed if switching costs are expected to decline over time, because of positive extemalities stemming from the diffusion of the new (« green ») production process. In this paper we examine the implications of these sources of inertia on the design of investment grants aimed at accelerating environmental innovation. We show that although « network externalities » tend to decelerate spontaneous (decentralized) technological change, they provide the regulator with the opportunity of saving public funds, by targeting grants to agent(s) with lower switching costs, instead of subsidizing the entire industry indiscriminately.
12 pages
Source : Persée ; Ministère de la jeunesse, de l’éducation nationale et de la recherche, Direction de l’enseignement supérieur, Sous-direction des bibliothèques et de la documentation.

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• Publié par: REVUE_D-ECONOMIE_INDUSTRIELLE
• Publié le: 01 janvier 1998
• Nombre de lectures: 45
• Langue: English

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Cesare Dosi
Michele Moretto
Auctioning green investment grants as a means of accelerating
environmental innovation
In: Revue d'économie industrielle. Vol. 83. 1er trimestre 1998. pp. 99-110.
Résumé
Outre les incertitudes relatives aux bénéfices privés, l'abandon volontaire d'une technologie polluante peut être ultérieurement
retardé par la perspective d'une réduction des coûts d'investissement liée à la diffusion du nouveau mode de production. Dans
cet article, seront analysées les implications de ces sources d'inertie sur la conception d'aides publiques à l'investissement ayant
pour but d'accélérer l'adoption de technologies vertes. Bien que la perspective d'une réduction des coûts d'investissement tende
à ralentir le changement technologique spontané, il sera montré que l'existence d'effets externes positifs, liés à la diffusion du
nouveau mode de production, offre au régulateur la possibilité de réduire les dépenses publiques en octroyant les subventions
aux entreprises ayant des coûts inférieurs d'innovation, au lieu de subventionner, sans discrimination, tout le secteur concerné.
Abstract
Besicles uncertainty about on-going private benefits, voluntary abandonment of a polluting technology may be (further) delayed if
switching costs are expected to decline over time, because of positive extemalities stemming from the diffusion of the new («
green ») production process. In this paper we examine the implications of these sources of inertia on the design of investment
grants aimed at accelerating environmental innovation. We show that although « network externalities » tend to decelerate
spontaneous (decentralized) technological change, they provide the regulator with the opportunity of saving public funds, by
targeting grants to agent(s) with lower switching costs, instead of subsidizing the entire industry indiscriminately.
Citer ce document / Cite this document :
Dosi Cesare, Moretto Michele. Auctioning green investment grants as a means of accelerating environmental innovation. In:
Revue d'économie industrielle. Vol. 83. 1er trimestre 1998. pp. 99-110.
doi : 10.3406/rei.1998.1702
http://www.persee.fr/web/revues/home/prescript/article/rei_0154-3229_1998_num_83_1_1702_ NORMES ET STANDARDS II.
ENVIRONNEMENTAUX :
INCITATIONS À L'INNOVATION ? Cesare DOSI
Michèle MORETTO
University of Padova
and Fondazione ENI
Enrico Mattei
AUCTIONING GREEN INVESTMENT
GRANTS AS A MEANS
OF ACCELERATING ENVIRONMENTAL
INNOVATION*
Mots clés : Volonté d'innovation environnementale « Green investment timing »
Subventions d'investissement, enchères bayesiennes.
Key words : Voluntary Environmental Innovation, Green Investment Timing, Investment
Grants, Bayesian Auction.
I. — INTRODUCTION AND THE SCOPE OF THE PAPER
The increasing number of firms trying to gain a reputation as environmentall
y friendly companies - by voluntarily abandoning polluting technologies or by
overmeeting environmental standards - has somewhat undermined the convent
ional wisdom about the inevitable trade-off between the social benefits and
private costs of pollution abatement (Porter and Van der Linde, 1995).
However, whether or not available empirical evidence of spontaneous environ
mental innovation justifies the increasing optimism about the capacity of pro
fit-expectations to activate self-regulatory mechanisms, is still controversial.
Here we do not intend to question the so called «win-win» paradigm which
is becoming increasingly popular not only among industrialists and their lob
bies, but among policy-makers and economists as well. Rather, we wish to
draw attention to the timing of spontaneous environmental innovation. For ins
tance, even when firms have discovered theoretically profitable opportunities
(*) We thank Carlo Carraro, Gerard Mondello, and participants at the Workshops
«Dynamique Industrielle & Constraintes Environnementales», Sophia- Antipolis, May 12-
13, 1997 and «2nd Toulouse Conference on Environment and Resource Economics»,
Toulouse, May 14-16, 1997, for valuable comments. The usual disclaimer applies.
REVUE D'ÉCONOMIE INDUSTRIELLE — n° 83, 1er trimestre 1998 99 from «green» investments, various sources of inertia may slow down volunta
ry abandonment of polluting technologies, so that public intervention - such
as the provision of innovation grants - is still required to avoid undesirable
levels of pollutant accumulation (Dosi and Moretto, 1996a, 1997).
Besides uncertainty about the innovation's appropriable benefits (whether,
and to what extent, consumers will actually be willing to reward a «green»
company ? How environmental regulation will evolve and to what extent it
will be affected by spontaneous innovations, etc.), an irreversible technologic
al change may be further delayed if switching costs are expected to decline
over time, because of a learning effect or other positive «network» externalit
ies stemming from the diffusion of the new (green) production process.
In this paper we examine the impact of these sources of inertia on the privat
e timing of switching to a green technology, and their implications on the
design of investment grants aimed at accelerating the technological change.
We show that although the expectation of a declining switching cost tends to
decelerate spontaneous (decentralized) innovation, it provides the regulator
with the opportunity of saving public funds, by targeting grants to agent(s)
with lower switching costs, instead of subsidizing the entire industry indiscri
minately. However, this requires knowledge about private switching costs.
Otherwise, appropriate incentive mechanisms are required to minimize agents'
information rents. To find a cost-effective «screaming» mechanism, we will
consider a Bayesian auction, where firms are required to declare their optimal
private switching time (or, equivalently, their optimal «trigger value»), and the
subsidy is granted to the firm which announces the lowest one.
II. — THE PRIVATE INVESTMENT TIMING
1. Basic assumptions
For the sake of simplicity we consider only two firms (i = 1,2), belonging to
the same industry, which have to decide whether to keep their present (identi
cal) polluting technology, or to switch to a green one. We assume the two tech
nologies are incompatible and the decision to switch is irreversible.
Besides improving environmental quality (a public good), the technological
change is expected to provide appropriable benefits (higher revenues and/or
lower variable costs). However, firms face uncertainty about the actual green
technology's (relative) operating benefit (hereafter «the benefit») per unit of
time.
100 REVUE D'ÉCONOMIE INDUSTRIELLE — n° 83, 1" trimestre 1998 • Assumption 1. The benefit per unit of time is described by a geometric
Brownian motion (1) :
dxt = ax,dt + 0XtdBt with a, a> 0 and x0 = x. (1)
where dB, is the increment of a standard Wiener process.
Firms have the option to switch by affording a sunk adoption cost, C(6, k).
Such a cost, which accounts for the pure capital expenditure, k, as well as the
opportunity cost of forgone investment opportunities, 6, depends on the numb
er of firms that have adopted.
• Assumption 2. Ct(6,n) = d^n), i =1,2 and n = 1,2 with k(\) > k(2).
•3. Whilst k(2) and k(l) are common knowledge, 0,, reflecting
agent i's perception of the technological change's opportunity cost, is private
information and takes on values in Q = [0,6] œ R+ with cumulative distribu
tion G(6J, and density g( 6J, which are public knowledge. «Types» are inde
pendent between firms, so they do not convey information about the other
agent's private valuation parameter.
2. The waiting game
Because of the sunk nature of switching costs, uncertainty about xt tends to
slow down abandonment of the polluting technology: i.e., it is worthwhile to
wait before exercising the option to switch alive in the hope of getting more
information about the technological change's actual rentability {irreversibility
effect).
Moreover, as shown hereafter, the technological change may be further
delayed by the expectation of a fall in switching costs, due to the diffusion of
the environmental innovation, as long as the valuation parameter 6 is private
information. In fact, while the «network benefit» [k(l) - k(2)] would make
coordination advantageous, uncertainty about the other agent's investment
opportunity cost may lead to a war of attrition: i.e. each firm will find it wor
thwhile to wait longer before exercising its option to switch, in the hope that
the rival firm will innovate first, so as to gain the network benefit by following
suit. If this does not happen and it becomes clear that the rival is reluctant to
adopt the green technology, the agent may eventually decide to go first.
(1) For simplicity, we assume that the evolutionary pattern of the green technology's benefit