Waiting Periods as a Screening Mechanism for Environmental Subsidies

Abstract

Using mechanism design, I demonstrate how delays can screen recipients of environmental subsidies and improve social welfare. The setting covers policy scenarios including energy efficiency and renewable energy subsidies where there are both marginal and inframarginal agents. The policy maker can exploit heterogeneous outside options across agents to screen: this is accomplished by implementing a wait between the program application and authorization to take the environmental action. First, I characterize how the degree of screening is impacted by the length of the waiting period and agents’ impatience. Second, I show the counterintuitive result that short waits may be worse for social welfare than both no wait and long waits. Finally, I describe the social-welfare maximizing waiting period mechanism and demonstrate that it often has nonzero waits. These results suggest that waiting periods can be used to screen out inframarginal participants in environmental subsidy programs, especially when agents are impatient.