Investment Versus Output Subsidies: Implications of Alternative Incentives for Wind Energy

Abstract

This paper examines the choice between subsidizing investment or output to promote socially desirable production. We exploit a natural experiment in which wind farm developers could choose an investment or an output subsidy to estimate the impact of these policy instruments on productivity. Using instrumental variables and matching estimators, we find that wind farms claiming the investment subsidy produced 10 to 12 percent less power than wind farms claiming the output subsidy, and that this effect reflects subsidy incentives rather than selection. Introducing investment subsidies caused the Federal government to spend 14 percent more per unit of output from wind farms.