Purpose This paper investigates how a regulator pursuing social welfare maximization designs an optimal subsidy scheme to stimulate technology innovation in the presence of a consumer green premium. Specifically, the authors solve the following questions: (1) Does the consumers' green premium affect the design of the subsidy scheme? (2) How should the firm choose a green technology innovation strategy under the optimal subsidy scheme? (3) Does technology innovation bring higher social welfare and lower environmental impact? Design/methodology/approach The authors first develop a game model to explore the impact of subsidy schemes on social welfare without considering technology innovation. Then the authors investigate two innovation strategies, in-house innovation and external introduction, under the optimal subsidy scheme. Finally, they illustrate the optimal choices of innovation strategy for the firm, consumers and regulators. Findings The results reveal that the subsidy scheme will not always increase social welfare, which depends on the environmental improvement coefficient of the unit green level. The optimal subsidy level increases with the green premium, but it is not related to the size of the consumer green segment. Moreover, the success rate of in-house innovation will raise the optimal green level, but the company benefits from an increased success rate of in-house innovation only when the green segment is large enough. The green segment size and external green level jointly determine the choice of technology innovation strategy. Originality/value This research is the first to analyze this problem while considering the green demand and subsidy scheme simultaneously as drivers of a firm's technology innovation, thereby providing new managerial implications for decisions by the regulator and firms.
