With Guy Meunier, September 2016
Subsidies are extensively used for promoting the deployment of green technologies (renewables, clean development mechanism, electric vehicles…). Such policies may generate high windfall profits: some of the projects that benefited from the subsidies would have been undertaken anyway. The paper formalizes this situation using a simple principal agent framework under adverse selection. The agent may invest or not and obtain some private benefit in case of success. The principal observes both the investment and the eventual success, which generates a social benefit. Under some conditions it is shown that a subsidy paid conditional on failure (and not on success) limits the windfall profit while encouraging a large portfolio of projects to be invested. The relevance of this policy is discussed in the context of facilitating investment for infrastructure for fuel cell electric vehicles.