Renewable energy price-control policy in the presence of innovation: is government pre-commitment preferable?

In a perfectly competitive market with a possibility of technological innovation we analyze guaranteed feed-in tariffs for electricity from renewables from a dynamic efficiency and social welfare point of view. Specifically, we model decisions about the technological innovation with convex costs within the framework of a game-theoretic model, and discuss implications for optimal policy design under different assumptions regarding regulatory pre-commitment. We find that in terms of dynamic efficiency no pre-commitment policies are shown to be at least as good as the pre-commitment ones. Thus, a government with a preference for innovation being performed if the achievable cost reduction is high should be in favor of the no pre-commitment regime.