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Mandates and the Incentives for Innovation

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  • Clancy, Matthew
  • Moschini, GianCarlo

Abstract

One prominent feature of the US biofuels sector is its reliance on mandates to enforce use. The performance of this policy tool has been mixed, with corn-based ethanol production successfully meeting targets but cellulosic ethanol falling well short of them. A crucial difference in this setting is that corn-based ethanol relies on a mature technology whereas the prospect of meeting cellulosic ethanol mandates was always predicated on the development of new technologies. Is it reasonable to expect that mandates would work well as an incentive for innovation? To address this question, we develop a partial equilibrium model with endogenous innovation to examine the incentives for innovation in production under a mandate and compare this policy to two benchmark situations: laissez-faire and a carbon tax. We find that a mandate creates relatively strong incentives for investment in R&D in low-quality innovations, but relatively weak incentives to invest in high-quality innovations. Moreover, mandates are likely to underperform carbon taxes in welfare terms.

Suggested Citation

  • Clancy, Matthew & Moschini, GianCarlo, 2014. "Mandates and the Incentives for Innovation," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170182, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea14:170182
    DOI: 10.22004/ag.econ.170182
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    File URL: http://ageconsearch.umn.edu/record/170182/files/Mandates%20and%20the%20Incentives%20for%20Innovation%20-%20AAEA%20Draft.pdf
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    References listed on IDEAS

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    1. Moschini, GianCarlo & Cui, Jingbo & Lapan, Harvey E., 2012. "Economics of Biofuels: An Overview of Policies, Impacts and Prospects," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), vol. 1(3), pages 1-28, December.
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    3. Matthew S. Clancy & GianCarlo Moschini, 2013. "Incentives for Innovation: Patents, Prizes, and Research Contracts," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 35(2), pages 206-241.
    4. Lapan, Harvey & Moschini, GianCarlo, 2012. "Second-best biofuel policies and the welfare effects of quantity mandates and subsidies," Journal of Environmental Economics and Management, Elsevier, vol. 63(2), pages 224-241.
    5. Jaffe, Adam B. & Newell, Richard G. & Stavins, Robert N., 2005. "A tale of two market failures: Technology and environmental policy," Ecological Economics, Elsevier, vol. 54(2-3), pages 164-174, August.
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    8. Requate, Till, 2005. "Dynamic incentives by environmental policy instruments--a survey," Ecological Economics, Elsevier, vol. 54(2-3), pages 175-195, August.
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    10. Parry, Ian W. H., 1995. "Optimal pollution taxes and endogenous technological progress," Resource and Energy Economics, Elsevier, vol. 17(1), pages 69-85, May.
    11. Magat, Wesley A., 1978. "Pollution control and technological advance: A dynamic model of the firm," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 1-25, March.
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    Keywords

    Agricultural and Food Policy; Environmental Economics and Policy; Research and Development/Tech Change/Emerging Technologies; Resource /Energy Economics and Policy; Risk and Uncertainty;

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