Technology Adoption and Optimal Policy

Fernando E. Alvarez, Francisco Buera and Nicholas Trachter

No 35133, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study optimal policy in a dynamic general equilibrium model where heterogeneous monopolistic 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)
Date: 2026-04
Note: EFG ITI PR
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