Download This PaperA Multi-Level Optimization Model of Infrastructure-Dependent Technology Adoption: Overcoming the Chicken-and-Egg Problem
30 Pages Posted: 7 May 2020 Last revised: 7 Dec 2020
Date Written: April 11, 2020
Abstract
Many technologies in energy, transportation, and telecommunications require large infrastructure systems to deliver benefits to adopters and society. Policymakers seeking to promote the diffusion of infrastructure-dependent technologies are often confronted with the ``chicken-and-egg" problem: consumers are reluctant to adopt the technology without adequate infrastructure available, and firms are reluctant to invest in infrastructure without a sufficient number of adopters. This chicken-and-egg problem can hinder the diffusion of new technologies and prolong the timeframe over which existing technological systems remain locked-in. In this paper, we formulate a stylized model of technology policy decision-making from the perspective of a policymaker who seeks to stimulate the market penetration of an infrastructure-dependent technology. Our model is a multi-level optimization problem in which a policymaker (first level) maximizes net social benefits by setting the levels of two incentives: a subsidy for a profit-maximizing firm (in equilibrium with two other firms, the second level) to invest in infrastructure that raises the benefit of adoption to consumers, and a direct subsidy for consumers to adopt the technology (third level). We analytically derive the firms' and consumers' optimal responses to the first-level policy decisions. Then, we analytically establish the optimal additional adoption — beyond the laissez-faire level — that the policymaker should stimulate by setting the subsidies. Finally, we present a case study on electric vehicle diffusion and obtain insights into how a policymaker should allocate resources to charging infrastructure and vehicle incentives. We also uncover a counterintuitive possibility where adoption can decrease with a technology's benefits.
Keywords: Cost benefit analysis, technology diffusion, multi-level optimization, mathematical program with equilibrium constraints, electric vehicles
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Benjamin D. Leibowicz (Contact Author)
University of Texas at Austin ( email )
ETC 5.128D
204 E. Dean Keeton St.
Austin, TX 78712
United States
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