Technology Adoption and Optimal Policy

Fernando E. Alvarez; Francisco J. Buera; Nicholas Trachter

doi:10.3386/w35133

Technology Adoption and Optimal Policy

Fernando E. Alvarez, Francisco J. Buera & Nicholas Trachter

Working Paper 35133

DOI 10.3386/w35133

Issue Date April 2026

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.

We thank Tomas Trachter for his help. We benefited from comments from seminar and conference participants at the University of Chicago, CREi, Federal Reserve Banks of Minneapolis and Richmond, Duke University, University of Pennsylvania, University of Cambridge, Columbia University, Stanford University, UCSD, Washington University, Bellaterra Growth Workshop, the 13th Macroeconomics Theory and Policy Conference in Tokyo, 17th Workshop in International Economics and Finance, Rutgers University, the 2026 end of year UTDT conference, SED in Copenhagen, 2025 NBER macroeconomics across time and space, and the 2025 Barcelona Summer Forum. The views expressed herein are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Richmond or the Federal Reserve System. We thank comments by Mark Aguiar, Manuel Amador, V.V. Chari, Harold Cole, Jeremy Greenwood, Hugo Hopenhayn, Patrick Kehoe, Pete Klenow, Andrea Lanteri, Juanpa Nicolini, Edouard Schaal, and Daniel Xu. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Fernando E. Alvarez
I have visited, taught, or consulted for the following institutions, where I have received an honorarium and/or paid traveling/lodging expenses:

EIEF, Rome, Italy. As research visitor.

University Torcuato Di Tella, Buenos Aires, Argentina, as a visiting professor.

Federal Reserve Bank of Chicago, US. As consultant to the Research Department.

Federal Reserve Bank of Richmond, US. As consultant to the Research Department.

Federal Reserve Bank of Minneapolis, US. As consultant to the Research Department.

Federal Reserve Bank of Philadelphia, US. As consultant to the Research Department.

Banco Central de Chile, Santiago Chile. As a conference participant, and writer of a book chapter.

European Central Bank, Frankfurt, Germany. As Duisenberg Fellow, as regular research visitor to the MPR division, and as a PRISMA visitor.

Goldman Sachs Global Market Institute, US. As a fellow.

Gerzensee’s Swiss Program for Doctoral Students, Switzerland. As a visiting professor.

Toulouse School of Economics, Toulouse, France. As a research visitor.

Cowles Foundation, Yale, US. As a research visitor.

Morris and Morris LLC, and Weinstein, Kitchenoff and Asher LLC, as a consultant to and compute damages on litigation related for financial contracts, US.

Bank of International Settlement, Basel, Switzerland. As a Lamfalussy senior research fellow.
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Fernando E. Alvarez, Francisco J. Buera, and Nicholas Trachter, "Technology Adoption and Optimal Policy," NBER Working Paper 35133 (2026), https://doi.org/10.3386/w35133.

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