Learning and Technology Adoptions

A government that wants to increase welfare by subsidizing either an industry’s sales or process innovations or both has to account for possible changes of production, when firms can foresee the government’s actions. In an optimal control framework welfare can be increased by subsidizing either an industry’s sales or process innovations. An earlier innovation date increases the price that is charged up to that innovation date, but decreases it afterwards, when process innovation costs depend on the date of innovation. Hence the welfare effect might be negative. This paper will be the first that sets up a framework, which helps to examine the optimal mixture of sales and innovation subsidies, where innovation costs depend on time and learning on cumulative production quantities. The process innovation can be understood as a substitute to learning. In this set up innovation subsidies are more beneficial for the monopolist, sales subsidies for consumers.