Strategic conflicts on the horizon: R&D incentives for environmental technologies

Abstract

Technological innovation is a key strategy for tackling climate change and other environmental problems. The required R&D expenditures however are substantial and fall on self-interested countries. Thus, the prospects of successful innovation critically depend on innovation incentives. This paper focuses on a specific mechanism for strategic distortions in this R&D game. In this mechanism, the outlook of future conflicts surrounding technology deployment directly impacts on the willingness to undertake R&D. Apart from free-riding, a different deployment conflict with distortive effects on innovation can occur. Low deployment costs and heterogeneous preferences might give rise to ‘free-driving’ (Weitzman, ML (2015). A voting architecture for the governance of free-driver externalities, with application to geoengineering. The Scandinavian Journal of Economics, 117(4), 1049–1068): The country with the highest preference for technology deployment, the free driver, may dominate the deployment outcome to the detriment of others. The present paper develops a simple two stage model for analyzing how technology deployment conflicts, free-riding and free-driving, shape R&D incentives of two asymmetric countries. The framework gives rise to rich findings, underpinning the narrative that future deployment conflicts extend to the R&D stage. While the outlook of free-riding unambiguously weakens innovation incentives, the findings for free-driving are more complex, including the possibility of excessive R&D as well as incentives for counter-R&D.

Daniel Heyen, In: Clim. Change Econ., 07, 1650013 (2016) [27 pages] DOI: http://dx.doi.org/10.1142/S2010007816500135