Technology Adoption and Optimal Policy

Fernando Alvarez, Francisco Buera and Nicholas Trachter

No 26-09, Working Paper from Federal Reserve Bank of Richmond

Abstract: We study optimal policy in a dynamic general equilibrium model where heterogeneous monopolistic competitive firms pay a fixed cost to adopt an exogenously growing frontier technology. Using Mean Field Games tools, we show that the optimal policy consists of two time-invariant subsidies: one correcting static misallocation, 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 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 escaping an abundance trap, where dismantling adopted technologies is optimal. In both cases, a temporary, costless supplementary policy restores unique implementation.

Keywords: production and investment; development dynamics (search for similar items in EconPapers)
Pages: 67
Date: 2026-05-12
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Working Paper: Technology Adoption and Optimal Policy (2026)
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DOI: 10.21144/wp26-09

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