Essays in Energy Economics and Entrepreneurial Finance

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Essays in Energy Economics and Entrepreneurial Finance

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Title: Essays in Energy Economics and Entrepreneurial Finance
Author: Howell, Sabrina T.
Citation: Howell, Sabrina T. 2015. Essays in Energy Economics and Entrepreneurial Finance. Doctoral dissertation, Harvard University, Graduate School of Arts & Sciences.
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Abstract: When does government intervention successfully correct perceived market failures? What effects do such interventions have on firm decisions? These questions are especially vital to the energy sector, which features large negative externalities, volatile commodity prices, and intensive regulation. My dissertation examines energy policies in three otherwise disparate contexts: a U.S. national research and development (R&D) subsidy intended to expedite clean energy technology deployment; a U.S. state-level oil price risk management policy targeting highway paving firms; and a Chinese fuel economy standard aimed at reducing oil consumption and hastening technology adoption among Chinese automakers. Each analysis evaluates the public policy and uses it to glean insight into firm financial constraints and innovation investment. Together, the three chapters contribute to the literatures on entrepreneurial finance, corporate risk management, innovation, and industrial policy.

Motivating the first paper is the observation that governments regularly subsidize new ventures to spur innovation, often in the form of R&D grants. I examine the effects of such grants in the first large-sample, quasi-experimental evaluation of R&D subsidies. I implement a regression discontinuity design using data on ranked applicants to the Small Business Innovation Research grant program at the U.S. Department of Energy. An award approximately doubles the probability that a firm receives subsequent venture capital and has large, positive impacts on patenting and the likelihood of achieving revenue. The effects are stronger for more financially constrained firms. In the second part of the paper, I use a signal extraction model to identify why grants lead to future funding. The evidence is inconsistent with a certification effect, where the award contains information about firm quality. Instead, the grant money itself is valuable, possibly because it funds proof-of-concept work that reduces investor uncertainty about the technology.

The second chapter examines how firms manage oil price risk when oil is an important input cost. Despite a rich theoretical literature, there is little empirical evidence about risk management heterogeneity across firm types. I evaluate a policy that shifts oil price risk in highway procurement
from the private sector to the government, reducing the cost of hedging to zero. In a triple-differences design using data from Kansas and Iowa, I show that firms value hedging oil price risk between the auction and commencement of work. Consistent with the prediction that hedging is more valuable for financially constrained firms, I find higher risk premiums in private vis-à-vis public firms and in smaller vis-à-vis larger firms. I also find that family ownership and a lack of diversification are associated with higher risk premiums. Competition is highly imperfect in this industry. Monopoly power in product markets, together with market frictions in derivative hedging, may limit the pass- through of risk to financial markets, and thus prevent efficient allocation of risk.

I turn to China - a very different economic setting - in the third chapter. Technology absorption is critical to emerging market growth. To study this process I exploit fuel economy standards, which compel automakers to either acquire fuel efficiency technology or reduce vehicle quality. With novel, unique data on the Chinese auto market between 1999 and 2012, I evaluate the effect of China’s 2009 fuel economy standards on firms’ vehicle characteristic choices. Through differences-in-differences and triple differences designs, I show that Chinese firms responded to the new policy by manufacturing less powerful, cheaper, and lighter vehicles. Foreign firms manufacturing for the Chinese market, conversely, continued on their prior path. For example, domestic firms reduced model torque and price by 12% and 13% of their respective means relative to foreign firms. Private Chinese firms outperformed state-owned firms and were less affected by the standards, but Chinese firms in joint ventures with foreign firms suffered the largest negative effect regardless of ownership. My evidence suggests that fuel economy standards and joint venture mandates - both intended to increase technology transfer - have instead retarded Chinese firms’ advancement up the automotive manufacturing quality ladder.
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