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

Can subsidies to consumers spur firms to innovate? I study the impacts of consumer subsidies in the global market for solar panels. I estimate a dynamic structural model of competition in which solar panel manufacturers invest to lower their costs, taking into account the impact of government subsidies on demand. The model produces two key insights. First, static economic methods can generate biased estimates of the effects of government policy. Before accounting for induced innovation, subsidies increased global solar adoption 49 percent over the period 2010-2015, leading to over $15 billion in external environmental benefits. These static estimates understate the subsidies’ true impacts: accounting for induced innovation increases the external benefits by at least 22 percent. Second, decentralized government intervention in a global market is inefficient. A subsidy in one country increases solar adoption elsewhere because it increases investment in innovation by international firms. This spillover underscores the need for international coordination to address climate change. ∗I am grateful to Joe Aldy, Myrto Kalouptsidi, Ariel Pakes, Rob Stavins, and Jim Stock for their invaluable guidance and support. I thank Jonathan Baker, Evan Herrnstadt, Robin Lee, Jing Li, Alex MacKay, Marc Melitz, Mark Shepard, Sam Stolper, Rich Sweeney, Elie Tamer, and participants in the Harvard Industrial Organization and Environmental Economics lunches and workshops, as well as the Northeast Workshop on Energy Policy and Environmental Economics, for helpful comments and conversations. The data used in this paper were obtained through a data use agreement with IHS Markit. I gratefully acknowledge support from U.S. EPA STAR Fellowship Assistance Agreement no. FP-91769401-0 and Harvard’s Joseph Crump Fellowship. †Email: gerarden@fas.harvard.edu. Website: http://scholar.harvard.edu/gerarden.