Designing Dynamic Subsidies to Spur Adoption of New Technologies

Abstract

We analyze the efficient subsidy for durable good technologies. We theoretically demonstrate that a policy maker faces a tension between intertemporally price discriminating by designing a subsidy that increases over time and taking advantage of future technological progress by designing a subsidy that decreases over time. Using dynamic estimates of household preferences for residential solar in California, we show that the efficient subsidy increases over time. The regulator’s spending quintuples when households anticipate future technological progress and future subsidies.