Governments subsidize research and development (R&D) through a mix of interdependent mechanisms, but the implications of subsidy interdependencies are not well understood. In this paper, I implement two quasi-experimental research designs to evaluate how the layering of innovation subsidies impacts firm R&D activity. I use funding rules and policy changes in the United Kingdom that generate exogenous variation in the cost of investing in R&D and find that direct grants and tax credits for R&D are complements for small firms but substitutes for larger firms. The effects are large. An increase in the tax credit rate enhances the effect of grant funding on small firms’ R&D expenditures so much that R&D expenditures more than double. For larger firms, higher tax credit rates cut the positive effect of grant funding in half. I also show that subsidy interactions influence the types of innovation efforts that emerge: with increases in both subsidy types, small firms steer efforts increasingly towards developing new goods as opposed to improving existing ones. I explore the underlying mechanisms and provide evidence that the complementarity for small firms is a result of easing financial constraints. Substitution by larger firms is consistent with public resources subsidizing infra-marginal R&D expenditures. Some alternative explanations can be ruled out, such as expenditure relabelling and inelastic inputs. Accounting for subsidy interactions is important for optimal innovation policy design and doing so could substantially improve the effectiveness of public spending on R&D.
Induced Innovation from Environmental Regulation: Evidence from China (with Yangsiyu Lu) [draft coming soon]
We examine the impact of an environmental regulation on jobs and firm performance in China, estimating effects on both “dirty” and “clean” firms. Doing so allows us to capture net effects and address spillovers in regulated regions. We find that the regulation increases jobs by 5% for dirty firms and 8% for clean firms. Total factor productivity (TFP) increases by 4.4% and 10% for dirty and clean firms, respectively. We provide evidence that the most plausible explanation is technology diffusion—a form of induced innovation that is consistent with the “Porter hypothesis”. Capital-labor substitution as well as lack of enforcement or effectiveness can be ruled out as alternative explanations. We also explore the distributional consequences of the regulation and find that, while the effects on TFP are positive only for firms in wealthier and more-populated regions, the positive effects on jobs are similar despite regional wealth and population.
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.
Innovation and Entrepreneurship in the Energy Sector (with David Popp, Ivan Hascic, and Nick Johnstone) [Invited chapter for forthcoming NBER book]
Innovation in the energy sector often proceeds slowly, and entrepreneurial start-up firms have historically played a minor role. We argue that this may be changing. Energy markets are going through a period of profound structural change. The rise of hydrofracturing lowered fossil fuel prices so much that natural gas is now the primary fuel for electricity generation in the US. Renewable energy technologies have also experienced significant cost and performance improvements. However, integrating intermittent resources creates additional grid management challenges requiring more innovation, which must be achieved quickly if climate policy goals are to be met. This chapter documents the evolving roles of innovation and entrepreneurship in the energy sector. First, we provide an overview of the energy industry, noting that many new energy technologies are smaller, more modular, and increasingly rely on innovation in other high-tech sectors where innovation typically moves more rapidly. We then conduct two descriptive data analyses, documenting a sharp decline in both clean energy patenting and start-up activity from about 2010 onwards. We discuss potential explanations and provide some evidence that innovation in existing technologies may simply have been successful, whereas continued innovation may be needed in enabling technologies that are more likely to depend on innovation in other sectors. We conclude that the increased complementarity of energy and high-tech innovations provides potential for faster paced energy innovation moving forward. However, understanding the impact of venture capital funding on such progress requires more rigorous evaluation.
Primary Research in Progress
“Innovation for Social Progress: When Imperfect Appropriability Meets Incorrect Prices” (with Sugandha Srivastav)
“Some Causal Effects of Policy Interactions on Energy Innovation” (with Sugandha Srivastav)
“Do Subsidies Impact Firm Innovation? Evidence from EV Manufacturing 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)