Designing Dynamic Subsidies to Spur Adoption of New Technologies∗

We analyze the efficient subsidy for durable good technologies. We theoretically demonstrate that a policymaker 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 new empirical estimates of household preferences for residential solar in California, we show that the efficient subsidy increases strongly over time if households are myopic and is much flatter if households have rational expectations. The regulator’s spending increases by 70% when households anticipate future technological progress and future subsidies.