Motivation crowding‐out and green‐paradox‐like outcomes

• Author: Marco Tolotti,Simone Marsiglio
• DOI: http://doi.org/10.1111/jpet.12444
• Published date: 01 September 2020
• Date: 01 September 2020

J Public Econ Theory. 2020;22:1559–1583. wileyonlinelibrary.com/journal/jpet © 2020 Wiley Periodicals, Inc.

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1559

Received: 13 June 2019

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Accepted: 25 March 2020

DOI: 10.1111/jpet.12444

ORIGINAL ARTICLE

Motivation crowding‐out and green‐paradox‐like

outcomes

Simone Marsiglio

1

|Marco Tolotti

2

1

Department of Economics and

Management, University of Pisa, Pisa, Italy

2

Department of Management, Università

Ca’Foscari Venezia, Venice, Italy

Correspondence

Simone Marsiglio, Department of

Economics and Management, University of

Pisa, via Cosimo Ridolfi 10, 56124 Pisa,

Italy.

Email: simone.marsiglio@unipi.it

Abstract

We analyze the effectiveness of environmental policy

in a framework in which households’utility is de-

termined by both private and social components, re-

presenting their extrinsic and intrinsic motivations to

undertake green actions, respectively. Environmental

policy, in the form of a subsidy aiming to incentivize

the adoption of a green technology, on the one hand,

directly increases households’extrinsic motivation,

while, on the other hand, indirectly decreases their

intrinsic motivation. We show that, provided that the

indirect effect dominates, the policy leads to

crowding‐out of intrinsic motivation which ulti-

mately undermines the effectiveness of the policy it-

self. Specifically, despite its positive effect on

environmental outcomes in the short run, the policy

will lead to a deterioration in long‐run environmental

outcomes, giving rise to a reverse green‐paradox‐like

outcome. Moreover, even in the case in which the

direct effect dominates, provided that the indirect

effect is large enough, the policy will generate a de-

terioration in short‐run environmental outcomes.

These results clearly suggest that the optimal design

of environmental policy is particularly complicated

since it requires to take into account also its effects on

intrinsic motivation.

1|INTRODUCTION

The optimal design of economic policy put in place to achieve desired goals is a complex task: It

often happens that the ex ante effects are dramatically different from the ex post results. The

problem is even more severe when dealing with environmental policy, since because of un-

certainty, irreversibility, and transboundary externality, understanding a priori how the natural

ecosystem will be affected by specific policy tools is often not possible. The most famous

example of how problematic the design of environmental policy might be is represented by the

so‐called green paradox (Sinn, 2008). Indeed, the green paradox suggests that since short‐and

long‐run effects may be different and economic agents optimally respond to policy changes,

environmental policy may eventually achieve an improvement in environmental outcomes in

the long run but only at the cost of deteriorating environmental outcomes in the short run (see

Sinn, 2008; Jensen, Mohlin, Pittel, & Sterner, 2015). In its simplest and original form the

argument underlying the green paradox is straightforward and extremely intuitive. Suppose

that policymakers in an attempt to reduce emissions set a carbon tax on polluting activities

which will rise over time consistently with the expected increase in the environmental damages;

owners or producers of these activities will optimally respond to the tax by anticipating their

activities to lower their tax exposure; even if lowering long‐run emissions, this clearly will rise

short‐term emissions, suggesting thus that green policies might end up being detrimental for

the environment. The traditional discussion of the green paradox involves extraction of a

nonrenewable resource (i.e., oil); in this context it is evident how carbon taxes, by affecting

the timing of optimal choices, might encourage producers to anticipate extraction to maximize

the present value of profits. More recently, the term green paradox has been used to refer to the

unintended effects of any type of environmental or climatic policy (see Jensen et al., 2015).

Following Sinn’s(

2008) seminal paper, a growing share of literature has tried to identify

alternative circumstances under which green‐paradox outcomes might occur, ranging from

carbon price dynamics, technology spillovers, implementation delays, and international trade

effects (see van der Werf & Di Maria, 2012 or Cairns, 2014 for some recent surveys). The aim of

this paper is to contribute to this literature by proposing a novel mechanism able to eventually

give rise to green‐paradox‐like outcomes, related to social effects and crowding‐out of intrinsic

motivation.

Consistent with the most recent interpretation of the term green paradox, we focus on

environmental policy not necessarily meant as a carbon tax on extraction activities. Specifically,

we consider a green policy which is introduced to provide individual households with some

additional incentive to adopt a new technology allowing to reduce ecological footprints.

1

The

policy is implemented through a subsidy, which in line with the expected reduction in en-

vironmental damage and balanced budget considerations, will fall over time; this implies that

the size of the incentive effectively received by single individuals adopting the green technology

changes according to the timing of their adoption decision. We show that if social effects and

intrinsic motivation matter in determining single individual’s optimal behavior and individuals’

intrinsic motivation are negatively affected by the subsidy, it might happen that the green policy

generates results very different from those hoped for by policymakers and an outcome similar to

1

The drivers of households’preferences towards green technologies have received growing attention over the last

decade (see, among others, Sundt & Rehdanz, 2015; Cardella, Ewing, & Williams, 2017). Different from extant lit-

erature, in this paper we focus on the role of social effects and intrinsic motivation as a determinant of households’

behavior and its implications in terms of green‐paradox‐like outcomes.

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