We study the impact of government financing designed to promote clean technology advancement. Government financing offers loans for financially constrained firms that manufacture and market clean-technology products. We build an analytical model to explore the impact of such government financing in the presence of market uncertainty. Our analysis shows that compared to prevalent commercial financing schemes such as bank financing and equity financing, government financing encourages firms to pursue more aggressive operational strategies by elevating technology levels and production volumes. While those aggressive measures yield environmental benefits, they also expose firms to increased bankruptcy risk. To address this issue, we propose a risk-mitigation strategy that manages bankruptcy risks within the bounds of a moderate environment target. Our work sheds light on the often-overlooked risk tied to government financing for clean technology development and offers insights into some of the high-profile bankruptcies of firms that received such financing.
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