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Seductive subsidies? An analysis of second-degree moral hazard in the context of photovoltaic solar systems

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  • Evert Reins

Abstract

This paper studies how subsidies for photovoltaic solar systems can lead to second-degree moral hazard - the impulse of installers to increase factors determining the total subsidies and/or transaction when consumers receive larger subsidy levels. Employing an instrumental variable strategy using plausibly exogenous variation in the size of subsidy levels to address concerns about self-selection of installers into specific subsidy levels, I quantify the impact of subsidy levels on the expected electricity output and transaction prices of PV systems in California. The results are consistent with hypothesized drivers of second-degree moral hazard as larger subsidy levels are associated with i) an increased measure of the expected electricity output leading to increased subsidies when third-parties own the PV system and ii) increased transaction prices when consumers themselves own the system. The results further suggest that subsidy programs should verify the work of an installer, for example during mandatory field inspections, as these reduce second-degree moral hazard.

Suggested Citation

  • Evert Reins, 2021. "Seductive subsidies? An analysis of second-degree moral hazard in the context of photovoltaic solar systems," IRENE Working Papers 21-03, IRENE Institute of Economic Research.
  • Handle: RePEc:irn:wpaper:21-03
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    More about this item

    Keywords

    PV systems; Credence goods; Subsidies; Asymmetric information; Second-degree moral hazard.;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H76 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Other Expenditure Categories
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation

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