Promoting clean technology adoption: To subsidize products or service infrastructure?

Abstract

We study the dynamic adoption process of clean-technology products (e.g., electric vehicles and solar photovoltaic panels), which is often hampered by the chicken-and-egg dilemma: at the early stage of commercialization, firms are reluctant to invest in service infrastructure before sufficient consumers adopt the products; on the other hand, consumers hesitate to adopt the products without such infrastructure. We examine two forms of government subsidies (as well as their combination) that aim to overcome this dilemma, namely service infrastructure subsidy and product subsidy. Although our analysis shows that both types of subsidies are generally conducive to clean technology adoption, it also reveals an interesting result: both infrastructure subsidy and product subsidy can be detrimental under certain conditions. In particular, the former may cause early adopters to delay their purchase, and the latter may interfere with the firm's investment incentives and lead to reduced overall adoption. As a policy guideline, we find that the optimal subsidy strategy follows a "sandwich rule," in that it is optimal to provide only the product subsidy when the deployment cost is sufficiently high or sufficiently low; however, if the cost falls in the moderate range, it is optimal to subsidize both.