The diffusion of new technology: adoption subsidies, spillovers, and transaction costs.

We establish the relation between optimal subsidy rates and spillovers from the sequential adoption of a new technology, we find that they evolve in the same direction over time. We show that spillovers, hence the subsidy rates, need not be monotonic. We show that when subsidy rates are increasing, their growth rate has to be paced by the growth rate of the present cost of the adoption of the new technology. We also show that increasing subsidies rates cannot produce the desired effect of accelerating adoption if the social cost of public funds is relatively high; hence first-best subsidy adoptions are not always viable.