Are ‘Complementary Policies’ Substitutes? Evidence from R&D Subsidies in the UK (JMP)
This paper tests whether direct subsidies (grants) and indirect subsidies (tax credits) for R&D are complements or substitutes. Governments have a long history of subsidizing R&D through a mix of support mechanisms, yet there is little evidence regarding how such policies interact in their impacts on innovation. I formalize a simple model of R&D policy complementarity and develop two quasi-experimental strategies that combine elements of regression discontinuity, difference-in-differences, and instrumental variables methods to estimate the causal joint effect of R&D grants and tax credits on firm behavior. I find that the two subsidy schemes are complements for small firms but substitutes for large firms. Increasing the generosity of tax credits induces the positive effect of grants to nearly double for small firms, while it is reduced by more than 50% for large firms. Continued work explores the implications for innovation outputs, knowledge spillovers, firm performance, and the direction of innovation. The methods can be applied to analyses of policy interactions in other settings.
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)
Uncertainty and salience effects lead to different policy implications, but the distinction between them is not always entirely clear in empirical studies of consumer behavior. 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.
Other Research in Progress
“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)
“Identifying Collaboration and Product Market Rivalry Effects on Innovation”
“Directed Technological Change: Evidence from Horizon 2020” (with Myra Mohnen and Ralf Martin)
“The Role of Gender in R&D and Innovation” (with Myra Mohnen)
“Steering the Climate: Comment” (with L. Mattauch and others)
“Mission Innovation or Mission Impossible? We Won’t Know Without More Evidence” (with Cameron Hepburn, John Rhys, and Niall Farrell)