Dynamic regulation on innovation and adoption of green technology with information asymmetry

Abstract

AbstractThis study investigates a regulator's dynamic policy to motivate firms' research on and adoption of green technology. In the proposed model, a firm makes unobservable efforts and can hide the technology's arrival from the regulator to avoid adoption costs. We find that the optimal policy follows a simple structure and induces part‐time efforts, rather than the maximal effort reported in previous studies. In particular, the regulator should offer no subsidy before the arrival of a technology report, provide a one‐time subsidy contingent upon that report, and always set a termination deadline. At the deadline, the firm is forced to select an external option that is associated with social costs. The optimal report‐based subsidy decreases with time. Under the optimal policy, the firm works until an effort deadline, makes no effort thereafter, and reports the technology as soon as it arrives. This study also characterizes the necessary and sufficient conditions under which the optimal policy reduces to one that leads, in terms of throughout time, to effort that is maximal or minimal. Our results indicate that policymakers should implement a policy that compensates firms more in the present and less in the future.