Adoption Subsidies vs Information Provision as Instruments of Technology Policy

Abstract

Our main concern in this paper' is to focus analytical attention on government policies which aim to influence the diffusion of technological innovations into actual use. This subject has been relatively neglected in recent discussions of technology policy which increasingly have centred on the first two parts of the Schumpeterian trilogy invention and innovation. Yet it would be difficult to exaggerate the significance of diffusion in the contexts which presently give rise to an interest in technology policy. What determines improvements in productivity and product quality, thereby enhancing economic welfare and the competitiveness of firms and industries, is not the rate of development of new technologies but the speed and extent of their application in commercial operations. However feasible the designs for new products and processes may be from an engineering standpoint, it is the prospects for diffusion which ultimately imparts economic value to this form of new knowledge. We have discussed elsewhere (Ireland and Stoneman (1984), David (1985)) how the generation and diffusion of new technology may be linked, but here we concentrate on diffusion per se. Governments have largely attempted to speed up the diffusion of new technologies. Two routes have been used. The first is by information provision policies, e.g. the Agricultural Extension Scheme in the United States and certain aspects of the Microprocessor Applications Programme in the United Kingdom. The second is by the use of subsidies, e.g. the favourable leasing terms offered to Japanese robot users. In this paper we are interested not only in whether such policies will speed up diffusion but also whether their impact is welfare improving, for as we argue below, there may be a limit to the desirable speed of take up of new technology. Our analysis is conducted within the framework of a model that integrates the two main prevailing theoretical approaches to diffusion (see Stoneman (1983)). The first approach is that diffusion is a reflection of the information propagation or learning process with firms adopting a technology as they come to learn of its existence. This literature has a strong tradition of using epidemic learning models which we follow below. The second approach allows that potential buyers of technology differ from each other in the benefits they