Investment versus Output Subsidies: Implications of Alternative Incentives for Wind Energy

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.