Use of Coupled Incentives to Improve Adoption of Environmentally Friendly Technologies

Abstract

We devise a system of coupled incentives that stimulate economic agents to coordinate their actions. The agents are price takers and their actions would be independent of one another (“uncoupled”) if incentives were not implemented. The action coordination is expected to help a technology transition from the current one to a modern one. The latter is assumed more environmentally friendly than the former. With the incentives in place, the problem becomes one of a principal-(multi) agent game. In the game, the principal chooses instruments sufficient to generate an environmentally friendly agent reaction.

We define a specific coupled incentive scheme (CIS), in which individual agents are rewarded for their joint actions' effect, rather than for their own actions' accomplishments. We show that a technology switch can be realised through CIS for a budget, for which no technology change would be achieved if only individual agent actions were compensated. We show under which conditions the agents' game has a unique solution and what the principal's choices are for the solution's implementation.

Keywords: Incentives, Environment, Technology, Joint action, Policy Implementation

JEL Classification: C72, O31