Governments subsidize R&D through a mix of interdependent mechanisms, but subsidy interdependencies are not well understood. This paper provides the first quasi-experimental evaluation of how R&D subsidy interactions impact firm behavior. I use funding rules and policy changes in the UK to show that direct grants and tax credits for R&D are complements for small firms but substitutes for larger firms. Increasing the generosity of both subsidy types more than doubles small firms’ R&D expenditures, but for larger firms, increasing tax credit rates cuts the positive effect of grants in half. I explore the mechanisms behind these findings and provide suggestive evidence that subsidy complementarity is consistent with easing financial constraints for small firms. Substitution by larger firms is most consistent with the subsidization of infra-marginal R&D expenditures. I rule out some alternative explanations. Subsidy interactions also impact the types of innovation efforts that emerge: with increases in both subsidies, small firms steer efforts increasingly towards developing new goods (i.e., horizontal innovations) as opposed to improving existing goods (i.e., vertical innovations). Accounting for subsidy interactions could substantially improve the effectiveness of public spending on R&D.
Prosumer Consumption Substitution and Disentangling Salience from Uncertainty (with Eoghan McKenna) [draft undergoing revisions]
We study prosumers to disentangle whether information affects behavior by reducing uncertainty or increasing salience. Using high-frequency data on solar PV households, we show that consumption substitution of dirty electricity for clean electricity increases in solar endowment levels but decreases in its variability. Real-time information offsets the uncertainty effect significantly but does not change the level effect. We use econometric and machine learning methods to derive consumption substitution counterfactuals and find that information increases consumer surplus substantially. The methods can be applied in other settings with misoptimizing consumers when within-subject treatment variation is unavailable.
Mission Innovation, Not Mission Impossible: Evaluating Clean Energy Innovation Policies (with Cameron Hepburn, John Rhys, and Niall Farrell) [2nd R&R with Nature Energy]
Clean energy innovation is pivotal for low-cost energy sector decarbonisation. Substantial public research and development funding is spent on energy innovation. Generating evidence on which support mechanisms most effectively drive clean energy innovations, and why, could improve their design moving forward. In this Perspective, we discuss five challenges that researchers often face when attempting to rigorously evaluate energy innovation policies and public subsidy programmes. We recommend solutions, such as developing new innovation outcome metrics that consider unique features of the energy sector and building databases that cover long time periods. We also suggest that researchers and funding agencies work together to implement randomised control trials or conduct quasi-experimental evaluation of existing programmes and policies wherever possible.
Research in Progress
“The Impact of Environmental Policy on Jobs and Firm Performance in China” (with Yangsiyu Lu) [draft coming soon, extended abstract can be found here]
“Innovation and Entrepreneurship in the Energy Sector” (with David Popp, Ivan Hascic, and Nick Johnstone)
“Some Causal Effects of Innovation and Environmental Policy Interactions” (with Suganda Srivastav)
“Do Firms Innovate More with Subsidies? Evidence from EV Subsidies in China” (with Yangsiyu Lu)
“R&D Subsidies and Directed Technological Change”
Unpublished Working Papers
“Steering the Climate System: An Extended Comment” (with L. Mattauch, R. Millar, F. van der Ploeg, A. Rezai, A. Schultes, F. Venmans, N. Bauer, S. Dietz, O. Edenhofer, N. Farrell, C. Hepburn, G. Luderer, F. Spuler, N. Stern, and A. Teytelboym)