Endogenous Growth, Backstop Technology Adoption and Optimal Jumps

We study a two-phase endogenous growth model in which the adoption of a backstop technology (e.g. solar) yields a sustained supply of essential energy inputs previously obtained from exhaustible resources (e.g. oil). Growth is knowledge-driven and the optimal timing of technology switching is determined by welfare maximization. The optimal path exhibits discrete jumps in endogenous variables: technology switching implies sudden reductions in consumption and output, an increase in the growth rate, and instantaneous adjustments in saving rates. Due to the positive growth e¤ect, it is optimal to implement the new technology when its current consumption bene.ts are substantially lower than those generated by old technologies.