DP11438 | Subsidies and Myopia in Technology Adoption: Evidence from Solar Photovoltaic Systems

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Many countries have relied on subsidies to promote the adoption of renewable energy technologies. We study a generous program to promote the adoption of solar photovoltaic (PV) systems through subsidies on future electricity production, rather than through upfront investment subsidies. We develop and estimate a tractable dynamic model of technology adoption, also accounting for local market heterogeneity. We exploit rich variation at pre-announced dates in the future production subsidies. Although the program led to a massive adoption, we find that households significantly undervalued the future benefits from the new technology. This implies that an upfront investment subsidy program would have promoted the technology at a much lower budgetary cost, so that the government essentially shifted the subsidy burden to future generations of electricity consumers.