NBER Paper Analyzes Optimal Policy for Technology Adoption
A new National Bureau of Economic Research working paper by Fernando E. Alvarez, Francisco J. Buera, and Nicholas Trachter investigates optimal policy within a dynamic general equilibrium model. The study focuses on heterogeneous monopolistic competitive firms that incur fixed costs to adopt exogenously growing frontier technologies. Utilizing Mean Field Games tools, the authors demonstrate that the optimal policy comprises two time-invariant subsidies: one addressing static misallocation caused by market power, and another correcting dynamic under-incentives for technology adoption. This framework applies regardless of the initial distribution of technology gaps or balanced growth paths. The research further explores scenarios with strong complementarities, leading to an S-shaped production function. It identifies conditions where efficient allocation requires escaping both poverty traps, supporting the concept of a Big Push, and abundance traps, where dismantling adopted technologies becomes optimal. In cases where unique implementation of the first best is not achieved, the authors propose that a temporary, costless supplementary policy can restore efficiency. This academic contribution provides significant insights into macroeconomic policy design, development economics, and growth theory.
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NBER Paper Analyzes Optimal Policy for Technology Adoption
A new National Bureau of Economic Research working paper by Fernando E. Alvarez, Francisco J. Buera, and Nicholas Trachter investigates optimal policy within a dynamic general equilibrium model. The study focuses on heterogeneous monopolistic competitive firms that incur fixed costs to adopt exogenously growing frontier technologies. Utilizing Mean Field Games tools, the authors demonstrate that the optimal policy comprises two time-invariant subsidies: one addressing static misallocation caused by market power, and another correcting dynamic under-incentives for technology adoption. This framework applies regardless of the initial distribution of technology gaps or balanced growth paths. The research further explores scenarios with strong complementarities, leading to an S-shaped production function. It identifies conditions where efficient allocation requires escaping both poverty traps, supporting the concept of a Big Push, and abundance traps, where dismantling adopted technologies becomes optimal. In cases where unique implementation of the first best is not achieved, the authors propose that a temporary, costless supplementary policy can restore efficiency. This academic contribution provides significant insights into macroeconomic policy design, development economics, and growth theory.
National Bureau of Economic Research Working Papers