A multi-level optimization model of infrastructure-dependent technology adoption: Overcoming the chicken-and-egg problem

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). Under certain assumptions about functional forms, we solve the full multi-level problem analytically through backward induction and derive closed-form expressions for the policymaker’s optimal subsidy levels. Then, we present a case study on policies to promote battery electric vehicle (BEV) diffusion. Our results reveal three main insights: (1) the optimal policy portfolio often subsidizes charging infrastructure more than BEV purchases, (2) infrastructure and adoption subsidies tend to be substitutes rather than complements, and (3) an increase in the marginal social benefit of BEV adoption shifts the optimal policy away from infrastructure subsidies and toward BEV subsidies.