Government Financing for Clean Technology Development: Financial Risk and Social Benefits

Abstract

Problem definition: We study implications of government financing to promote clean technology development, which provides loans for financially constrained firms that manufacture and sell clean-technology products. Methodology/results: We build an analytical model to explore the impact of such government financing in the presence of market uncertainty. Our analysis shows that government financing results in the firm's more aggressive technology investment and exposes the firm to a higher bankruptcy risk. We also provide empirical evidence based upon the clean-technology projects financed by loan programs under the U.S. Department of Energy to support this analytical result. To deal with the high bankruptcy risk under government financing, we propose a risk-mitigating mechanism where the government utilizes a more sophisticated loan contract that ties the firm's environment commitment and quantity commitment in such a way that discourages the firm's over-investment in technology. Managerial implications: Our work sheds light on the overlooked risk associated with government financing for clean technology development, and provides rationales for some of the high-profile bankruptcies of the financed firms.