Self-fulfilling prophecies in the transition to clean technology

Smulders, S. and Zhou, S. ORCID: https://orcid.org/0000-0002-9147-2980 (2026) Self-fulfilling prophecies in the transition to clean technology. American Economic Journal: Macroeconomics. ISSN 1945-7715 (Unpublished)

Abstract/Summary

Technological lock-in has been a standard explanation for the slow take-off of clean innovation, but is hard to reconcile with forward-looking investors who anticipate the eventual switch to clean technologies. We provide an alternative explanation: strategic investment complementarities shape innovation and self-fulfilling prophecies can lead to delayed low-carbon transition. We analyze a standard directed technical change model with clean and dirty inputs. We find that when the two are good substitutes, two stable steady states can co-exist, each allowing multiple transitional paths. Optimal low-carbon transition requires a Pigouvian tax rule combined with a coordination device; commitment to a Pigouvian tax trajectory cannot solve a coordination failure

Item Type	Article
URI	https://centaur.reading.ac.uk/id/eprint/128293
Refereed	Yes
Divisions	Arts, Humanities and Social Science > School of Politics, Economics and International Relations > Economics
Publisher	American Economic Association
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