Demanding Innovation: The Impact of Consumer Subsidies on Solar Panel Production Costs

Abstract

Private sector innovation is critical to mitigating and adapting to climate change. This 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, I estimate a dynamic structural model of competition among solar panel manufacturers. The model captures important features of the industry, including the role of government subsidies for solar adoption, and I employ a unique measure of technological progress that is observable and verifiable. The results produce two main insights. First, ignoring innovation by firms can generate biased estimates of the effects of government policy. Second, decentralized government intervention 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. This spillover underscores the need for international coordination by governments and the private sector to address climate change. This paper was accepted by Erica Plambeck, Special Section of Management Science on Business and Climate Change. Funding: The author acknowledges support from the U.S. Environmental Protection Agency [Science to Achieve Results (STAR) Fellowship Assistance Agreement FP-91769401-0] and Harvard [Joseph Crump Fellowship]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4662 .