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APPLIED ECONOMICS AND POLICY


Demanding Innovation: Te Impact of Consumer Subsidies on Solar Panel Production


Costs Management Science, 69, 12, December 2023 LINK TO PAPER


TODD GERARDEN ASSISTANT PROFESSOR Charles H. Dyson School


of Applied Economics and Management Cornell SC Johnson College of Business Cornell University


Author • Todd Gerarden


Assistant Professor, Charles H. Dyson School of Applied


Economics and Management, Cornell SC Johnson College of Business, Cornell University


Summary Private sector innovation is critical to mitigating and adapting to climate


change. In principle, subsidies to consumers can spur firms to innovate and can also facilitate cost reductions for emerging technologies. However, there is little empirical evidence on this relationship to inform policy. Crucially, analysis using static economic methods will understate the impacts of policies that induce technical change. Tis paper studies innovation in solar energy technology, a key source of clean energy that has experienced rapid price declines over the past decade.


To understand the causes and effects of innovation, Gerarden estimates a dynamic structural model of competition among solar panel manufacturers, capturing important features of the industry, including the role of government subsidies for solar adoption. Te author employs a unique measure of tech- nological progress that is observable and verifiable and produces two main insights. First, ignoring innovation by firms can generate biased estimates of the effects of government policy. Second, decentralized government interven- tion in a global market generates spillovers; a subsidy in one country causes international firms to innovate more, leading to lower prices and increased adoption elsewhere. Tis spillover underscores the need for international co- ordination by governments and the private sector to address climate change.


TO IMPACT CONTENTS


RESEARCH WITH IMPACT: CORNELL SC JOHNSON COLLEGE OF BUSINESS • 2023 EDITION


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