Technology Adoption And Adaptation To Climate Change — A Case-Based Approach

We present a model of technological adaptation in response to a change in climate conditions. The main feature of the model is that new technologies are not just risky, but also ambiguous. Pessimistic agents are thus averse to adopting a new technology. Learning is induced by optimists, who are willing to try out technologies about which there is little evidence available. We show that both optimists and pessimists are crucial for a successful adaptation. While optimists provide the public good of information which gives pessimists an incentive to innovate, pessimists choose the new technology persistently in the long-run which increases the average returns for the society. Hence, the optimal share of optimists in the society is strictly positive. When the share of optimists in the society is too low, innovation is slow and the obtained steady-state is inefficient. We discuss two policies which can potentially alleviate this inefficiency: Subsidies and provision of additional information. We show that if precise and relevant information is available, pessimists would be willing to pay for it and consequently adopt the new technology. Hence, providing information might be a more efficient policy, which is both self-financing and results in better social outcomes.