Subsidies for sustainable production: Effects of changing subsidy level
Report, 2005

A multi-trial duopoly price-setting game was used to investigate the potential ef-fectiveness of a subsidy system aimed at reducing sales and thereby production of environmentally harmful products. In real life it is however likely that a subsidy level will never remain fixed, either nominally or in real value. Producers may also have unreliable perceptions of the subsidy level even if it does not change. Therefore, a subsidy, either fixed and known, varying randomly, or varying sys-tematically across trials, was investigated. The results showed that both fixed and known, as well as varying subsidy levels led to higher prices and thus re-duced sales compared to without a subsidy. Knowledge of a fixed subsidy level or expectations about a subsidy level based on previous trials, appeared to make participants refrain from setting lower prices than the subsidy level. Further-more, the results indicated that participants attempted to maximize their profit by selling to the lowest price, thus they stayed competitive and did not exploit the subsidy.

experimental game

sustainable production

Emission policy

governmental subsidies

market experiment


Lars E. Olsson

University of Gothenburg

M Akiyama

Tommy Gärling

University of Gothenburg

Mathias Petter Gustafsson

University of Gothenburg

Peter Loukopoulos

University of Gothenburg

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