Finance Papers

Document Type

Journal Article

Date of this Version

5-2016

Publication Source

Management Science

Volume

62

Issue

5

Start Page

1235

Last Page

1258

DOI

10.1287/mnsc.2015.2173

Abstract

This paper studies government subsidies for green technology adoption while considering the manufacturing industry’s response. Government subsidies offered directly to consumers impact the supplier’s production and pricing decisions. Our analysis expands the current understanding of the price-setting newsvendor model, incorporating the external influence from the government, who is now an additional player in the system. We quantify how demand uncertainty impacts the various players (government, industry, and consumers) when designing policies. We further show that, for convex demand functions, an increase in demand uncertainty leads to higher production quantities and lower prices, resulting in lower profits for the supplier. With this in mind, one could expect consumer surplus to increase with uncertainty. In fact, we show that this is not always the case and that the uncertainty impact on consumer surplus depends on the trade-off between lower prices and the possibility of underserving customers with high valuations. We also show that when policy makers such as governments ignore demand uncertainty when designing consumer subsidies, they can significantly miss the desired adoption target level. From a coordination perspective, we demonstrate that the decentralized decisions are also optimal for a central planner managing jointly the supplier and the government. As a result, subsidies provide a coordination mechanism.

Copyright/Permission Statement

https://doi.org/10.1287/mnsc.2015.2173

Keywords

government subsidies, green technology adoption, newsvendor, cost of uncertainty, supply chain coordination

Embargo Date

3-14-2016

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Date Posted: 27 November 2017

This document has been peer reviewed.