Event Title

Environmental R&D Tournaments

Location

Breakout Session B: Business & Economics

CASB 104

Start Date

8-4-2022 4:15 PM

End Date

8-4-2022 4:30 PM

Description

Research and Development (R&D) tournaments (or contests) reward a firm with the best innovation in a particular industry. Such “green” R&D tournaments, focused on technologies that reduce emissions, usually constitute a fixed reward, for example ClimateTech & Energy Prize at MIT, Clean Tech Award Competition, the Novo Nordisk Innovation Challenge, and Elon Musk’s offer of a $100 million prize for the best carbon-capture technology. However, if firms are facing environmental policy (such as an emissions fee), a secondary reward may come in form of reduced regulatory burden. The more effective the technology the lower the firm’s emissions, and the less the firm pays in emissions fees, meaning that the reward for the winning firm is determined by how effective the technology is (an endogenous reward). We use an economic model to investigate the impacts of investment in green R&D tournaments with endogenous rewards. The firm that ‘wins’ the tournament is the one which develops the most effective technology at reducing emissions and gains sole property rights in using that technology. This reduces the burden of the emission fee in which the winning firm faces, while also lowering the fee all firms face. We employ the use of a Monte Carlo simulation (repeated random sampling with an optimization procedure) to numerically analyze the results. Our primary focus is the firms’ investment into green technology, the emission fee (which is based on the firms’ investment), resulting market output, and social welfare. We then compare these results to a non-tournament model of green R&D investment well established in the literature. We find that the tournament induces firms to invest more than in a non-tournament R&D model, and that welfare is higher under the tournament than the non-tournament. These results run contrary to the “tournament effect” found in the literature on tournaments with fixed prizes as rewards which says that tournaments reduce the incentives to invest in R&D. With endogenous rewards, there is a much greater incentive to the investor because winning confers a competitive advantage over market rivals through a lower emissions fee, which reduces costs, and is therefore preferable to a fixed fee. *Strandholm thanks the University of South Carolina Upstate Office of Sponsored Awards and Research Support for partial funding of the project through the Scholarly Start-Up Package under the title, “Environmental R&D tournaments with spillovers.”

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Apr 8th, 4:15 PM Apr 8th, 4:30 PM

Environmental R&D Tournaments

Breakout Session B: Business & Economics

CASB 104

Research and Development (R&D) tournaments (or contests) reward a firm with the best innovation in a particular industry. Such “green” R&D tournaments, focused on technologies that reduce emissions, usually constitute a fixed reward, for example ClimateTech & Energy Prize at MIT, Clean Tech Award Competition, the Novo Nordisk Innovation Challenge, and Elon Musk’s offer of a $100 million prize for the best carbon-capture technology. However, if firms are facing environmental policy (such as an emissions fee), a secondary reward may come in form of reduced regulatory burden. The more effective the technology the lower the firm’s emissions, and the less the firm pays in emissions fees, meaning that the reward for the winning firm is determined by how effective the technology is (an endogenous reward). We use an economic model to investigate the impacts of investment in green R&D tournaments with endogenous rewards. The firm that ‘wins’ the tournament is the one which develops the most effective technology at reducing emissions and gains sole property rights in using that technology. This reduces the burden of the emission fee in which the winning firm faces, while also lowering the fee all firms face. We employ the use of a Monte Carlo simulation (repeated random sampling with an optimization procedure) to numerically analyze the results. Our primary focus is the firms’ investment into green technology, the emission fee (which is based on the firms’ investment), resulting market output, and social welfare. We then compare these results to a non-tournament model of green R&D investment well established in the literature. We find that the tournament induces firms to invest more than in a non-tournament R&D model, and that welfare is higher under the tournament than the non-tournament. These results run contrary to the “tournament effect” found in the literature on tournaments with fixed prizes as rewards which says that tournaments reduce the incentives to invest in R&D. With endogenous rewards, there is a much greater incentive to the investor because winning confers a competitive advantage over market rivals through a lower emissions fee, which reduces costs, and is therefore preferable to a fixed fee. *Strandholm thanks the University of South Carolina Upstate Office of Sponsored Awards and Research Support for partial funding of the project through the Scholarly Start-Up Package under the title, “Environmental R&D tournaments with spillovers.”