Optimal Incentive for Regulated Production

TL;DR

This paper analyzes how regulatory incentives influence firms' strategic decisions in adopting cleaner technologies through stochastic control models across different competitive scenarios.

Contribution

It introduces a comprehensive stochastic control framework to model and analyze optimal investment and production strategies under regulation and competition.

Findings

Regulatory incentives significantly accelerate adoption of clean technologies.

Firms' strategies depend on competitive dynamics and regulatory structures.

Optimal policies vary with market and technological complexity.

Abstract

This paper explores stochastic control models in the context of decarbonization within the energy market. We study three progressively complex scenarios: (1) a single firm operating with two technologies-one polluting and one clean,(2)two firms model and (3) two firms without any regulatory incentive. For each setting, we formulate the corresponding stochastic control problem and characterize the firms' optimal strategies in terms of investment and production. The analysis highlights the strategic interactions between firms and the role of incentives in accelerating the transition to cleaner technologies.