Optimal Government Incentives to Improve the New Technology Adoption: Subsidizing Infrastructure Investment or Usage?

Abstract

To promote new technology adoption, governments around the world are contemplating different ideas to develop effective subsidy policies. At the new technology infrastructure investment stage, governments can use investment subsidy to reduce the new technology firms' investment cost; at the market stage of promoting the new technology, governments can use usage subsidy to reduce consumers' cost of using the service provided by the new technology firms. In this study, we develop a game-theoretic model to examine the impact of both investment subsidy and usage subsidy on the new technology adoption. We find that both the investment subsidy and usage subsidy can entice the new technology firms to increase the infrastructure investment level so as to further improve the market penetration of the new technology. Next, by also examining the optimal government subsidy policy subject to a budget constraint, we find that the optimal government subsidy policy depends on both the government's objective function and the amount of the budget. Specifically, when the budget is low, both investment subsidy and usage subsidy are equally effective in improving market penetration, consumer surplus, firm profit, and social welfare. However, when the budget is high, it is optimal for the government to offer investment subsidy only to maximize the market penetration of the new technology; while it is optimal for the government to offer usage subsidy only to maximize consumer surplus or social welfare. Our results can serve as guidelines for the government when designing the optimal subsidy programs to achieve different goals associated with new technology promotion.