This study examines the choice between subsidizing investment and subsidizing output to promote socially desirable production. We exploit a natural experiment to estimate the impact of subsidy margin on the productivity of wind farms. Using instrumental variable and matching estimators, we find that investment subsidy claimants produce 10%–12% less power than they would have under the output subsidy. Accounting for extensive margin effects, we show that output subsidies are more cost-effective than investment subsidies over a large range of output targets.
Aldy, Joseph, Todd D. Gerarden, and Richard L. Sweeney. "Investment versus Output Subsidies: Implications of Alternative Incentives for Wind Energy." Journal of the Association of Environmental and Resource Economists 10.4 (July 2023): 981-1018.