Self-Fulfilling Prophecies in the Transition to Clean Technology

Sjak Smulders and Sophie Zhou

American Economic Journal: Macroeconomics, 2026, vol. 18, issue 3, 304-42

Abstract: Technological lock-in has been a standard explanation for the slow take-off of clean innovation, but is hard to reconcile with forward-looking investors who anticipate the eventual switch to clean technologies. We provide an alternative explanation: strategic investment complementarities shape innovation and self-fulfilling prophecies can lead to delayed low-carbon transition. We analyze a standard directed technical change model with clean and dirty inputs. Under good input substitutability, two stable steady states co-exist, each allowing multiple transitional paths. Optimal low-carbon transition requires a Pigouvian tax rule combined with a coordination device; commitment to a Pigouvian tax trajectory cannot solve a coordination failure.

JEL-codes: H23 O31 O33 O44 Q54 Q55 (search for similar items in EconPapers)
Date: 2026
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DOI: 10.1257/mac.20220316

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