Impact of financial incentives on green manufacturing: Loan guarantee vs. interest subsidy

This paper studies the impact of government support on the production and green investment of a manufacturing firm with financing needs. Two financial stimulus policies are explored: loan guarantee and interest subsidy. Based on game-theoretic models that incorporate the manufacturer's operations and the bank's risk preference, we attempt to explore the implications for the economic and environmental performance of government interventions. Our results reveal that: (1) both policies are effective in scaling up production volume and economic performance, but loan guarantee policy is ineffective in boosting green investment; (2) the downside risk the bank bears under the loan guarantee policy is not less than that under an interest subsidy policy, due to limited intervention from government; (3) it is optimal for the government to intervene in the manufacturer's financing activity when the environmental value is above a certain level. Further, we demonstrate that whether loan guarantee policy outperforms interest subsidy depends on consumers’ green awareness, green investment efficiency, environmental value, as well as bank's attitude toward risk. Finally, we test the robustness of our findings by extending the base models to other scenarios and find that the main results still hold in these extensions.