673 / 2024-05-07 10:13:04

Impact of Government Subsidy and Consumer Heterogeneity on Green Product Innovation

Consumer heterogeneity,product design,subsidy policy,pricing

Encouraging green product innovation and adoption is of great importance for governments in dealing with environmental issues, for which subsidies play a crucial role. Meanwhile, there is a growing stimulus in the retail market as consumers become more willing to pay for products with green features. This paper captures these two key incentives for green technology innovation: subsidy and consumers' willingness to pay a premium. It studies how these incentives affect the firm's innovation decision to identify the optimal subsidy policy for the welfare-maximizing government. Our results offer sufficient conditions for the firm to innovate and reveal the differentiating effect of subsidy policies on innovation for various recipients. In addition, we find the optimal subsidy policy and demonstrate the existence of a subsidy portfolio, which can yield greater social welfare than a single subsidy policy.