Technology Adoption and Optimal Policy

Fernando E. Alvarez, Francisco J. Buera and Nicholas Trachter
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Fernando E. Alvarez: The University of Chicago, Department of Economics and NBER
Francisco J. Buera: Washington University in St. Louis, Department of Economics and NBER
Nicholas Trachter: Federal Reserve Bank of Richmond

No 2026-59, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: We study optimal policy in a dynamic general equilibrium model where heterogeneous monopolistically competitive firms pay a fixed cost to adopt a frontier technology that grows exogenously. Using Mean Field Games tools, we show that the optimal policy consists of exactly two time-invariant subsidies: one correcting the static misallocation from market power, and one correcting the dynamic under-incentive to adopt. This holds outside of balanced growth paths, for any initial distribution of technology gaps. We analyze a simplified version of the model that aggregates to a Neoclassical Growth Model with an S-shaped production function whenever complementarities are strong, and fully characterize when the optimal policy uniquely implements the first best. When it does not, two novel results emerge: the efficient allocation prescribes escaping a poverty trap—providing an explicit optimality foundation for a Big Push—and, more surprisingly, escaping an abundance trap, where dismantling adopted technologies is optimal. In both cases, a temporary, costless supplementary policy restores unique implementation.

JEL-codes: D92 O14 O25 O40 (search for similar items in EconPapers)
Pages: 88 pages
Date: 2026
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