Are ‘Complementary Policies’ Substitutes? Evidence from R&D Subsidies in the UK [JMP] [draft coming soon]
Governments often subsidize R&D through a mix of interdependent mechanisms, but how subsidy interactions impact firm behavior is not well understood. This paper provides the first quasi-experimental evaluation of R&D subsidy interactions. I use non-overlapping funding rules and policy changes in the UK to show that direct subsidies (grants) and indirect subsidies (tax credits) are complements for small firms but substitutes for larger firms in their effects on innovation investments. 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 consistent with the subsidization of infra-marginal projects and relabeling. Subsidy interactions also impact the types of innovations that emerge: with increases in both subsidies, small firms steer efforts increasingly towards new goods (i.e., horizontal innovations) as opposed to existing goods (i.e., vertical innovations), whereas larger firms substitute away from them. Accounting for subsidy interactions could substantially improve the effectiveness of public spending on innovation.
Pass-Through as a Test for Market Power: An Application to Solar Subsidies (with Arthur van Benthem) [submitted] (previously “The Surprising Pass-through of Solar Subsidies“, NBER Working Paper No. 23260).
We formalize pass-through over-shifting as a simple yet under-utilized test for market power. We apply this test in the market for solar energy. Specifically, we estimate the pass-through of solar subsidies to solar system prices using rich micro-level transaction and subsidy data from California. Buyers of solar systems capture nearly the full subsidy, while there is more-than-complete pass-through to lessees. We conclude that solar markets are imperfectly competitive by ruling out alternative explanations for over-shifting, and reinforce this conclusion with a test of solar demand curvature. This procedure can serve to detect market power beyond the solar market.
Disentangling Uncertainty and Salience: The Case of Solar Self-Consumption (with Eoghan McKenna) [draft undergoing revisions]
Uncertainty and salience effects lead to different policy implications, but the distinction between their effects on behavior is not always distinguished in empirical studies of consumers. We use high-frequency data on solar energy generation and electricity consumption to disentangle rational habits from endowment salience effects. We test how providing real-time information regarding onsite solar generation affects household electricity consumption substitution patterns. Preliminary results suggest that households behave rationally towards uncertainty but do not fully optimize with respect to endowments that are imperfectly salient. With increased salience, the endowment elasticity increases by 4 percent on average and up to 18 percent depending on time of year and day. Continued work is applying econometric and machine learning methods to derive salience-adjusted self-consumption counterfactuals and welfare effects. The methods can be applied in other settings with misoptimizing consumers.
“To Buy or Lease? Business Model Consumer Preferences in the Residential Solar PV Market,” [R&R with The Energy Journal] (with Harrison Fell and Ben Sigrin)
“Mission Innovation, Not Mission Impossible” (with Cameron Hepburn, John Rhys, and Niall Farrell) [R&R with Nature Energy]
“Is This the End of Conventional Wholesale Electricity Markets?” (with Niall Farrell, Cameron Hepburn, and John Rhys) [R&R with Oxford Review of Economic Policy]
“Steering the Climate: Comment” (with L. Mattauch and others) [submitted]
“R&D Subsidy Interactions and Directed Technological Change”
“Directed Technological Change: Evidence from Horizon 2020” (with Myra Mohnen and Ralf Martin)
“Environmental Policy and Labor Demand in China” (with Yangsiyu Lu)