Are “Complementary Policies” Substitutes? Evidence from R&D Subsidies in the UK [last revised September 2020]
This paper studies whether direct subsidies and tax credits for private research and development (R&D) are complements or substitutes. Governments often subsidize private R&D using both, but the ways in which they interact affect the optimal policy mix and are not well understood. I implement two quasi-experimental research designs using funding rules that generate exogenous variation in the cost of investing in R&D and find that grants and tax credits are complements for small firms but substitutes for larger firms. An increase in the tax credit rate enhances the effect of grant funding for small firms so much that R&D expenditures double, which can be explained by financing constraints, yet it cuts the positive effect of grant funding in half for larger firms. Innovation policy should include both interventions for small firms but only the one with the greatest returns for larger firms.
Induced Innovation from Environmental Regulation: Evidence from China (with Yangsiyu Lu) [draft coming soon]
We study the impact of an environmental regulation on manufacturing firms’ productivity in China using a heterogeneous difference-in-differences approach. We find that there is no effect on total factor productivity (TFP) for firms in directly regulated industries and it increases by 4.7% for firms in indirectly regulated industries, on average. When considering responsive industries only, TFP increases by 8.3% for directly regulated firms and 16% for indirectly regulated firms. The results are driven by more efficient use of labor, capital, and intermediate inputs as opposed to capital-labor substitution or increases in input levels. Firms appear to adopt different compliance and innovation strategies, which range from fuel-switching to organizational innovations. We also explore the political economy of environmental regulation. Although the evidence suggests that the regulation was enforced, large, dirty, state-owned firms appear to benefit from political favoritism post-policy implementation.
Prosumer Behavior, Information Technology, and Disentangling Salience from Uncertainty (with Eoghan McKenna) [draft undergoing revisions]
We disentangle whether real-time information provision affects demand by enhancing price salience or reducing uncertainty. Using high-frequency electricity data, we study households with solar panels and document three main findings. First, prosumers — agents that both consume and produce the same good or service — increase consumption by 6% when prices drop to zero due to onsite solar generation. They shift the timing of consumption away from periods with higher prices such that there is no aggregate effect. Second, consumption is increasing in price uncertainty. Third, information provision corrects the uncertainty effect but does not change real-time responsiveness to prices, indicating that the intervention affects behavior through the uncertainty channel rather than salience. We develop a machine learning approach that corroborates these findings. Our results provide insight into the limitations of behavioral interventions in the electricity sector and suggest that variability smoothing, such as through automation or electricity storage, may have greater potential for improving environmental performance.
Research in Progress
“Innovation for Social Progress: When Imperfect Appropriability Meets Incorrect Prices” (with Sugandha Srivastav)
“Reducing Investment Risk with Revenue Certainty” (with Sugandha Srivastav)
“R&D Subsidies and Directed Technological Change”
Permanent 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)