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Lunch seminar : Jean-Pierre Ponssard

Joint wotk with Guy Meunier

Abstract:

Subsidies are extensively used for promoting the deployment of green technologies (renewables, clean development mechanism, electric vehicles…).  Such policies are implemented in the absence of a carbon market for long term investment and/or because of multiple externalities (environmental, learning-by-doing, spill-overs…). However they may generate high windfall profits: some of the projects that benefited from the subsidies would have been undertaken anyway. The paper formalizes this situation using a simple principal agent framework under adverse selection. The agent may invest or not and obtain some private benefit in case of success. The principal observes both the investment and the eventual success, which generates a social benefit. Under some conditions it is shown that a subsidy paid conditional on failure (and not on success) limits the windfall profit while encouraging a larger portfolio of projects to be invested than a flat subsidy. The relevance of this policy is discussed in connection with the policy currently used by ADEME for the Programme d’Investissements d’Avenir. 

Keywords: green technologies, subsidies, adverse selection

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