David Argente, Professor, Penn State
Abstract: This paper develops a dynamic model of technology adoption featuring a network effect, in which the benefits for users increase with the number of adopters. We argue that such an effect is an inherent feature of several technologies, such as means of payments. We show that network effects give rise to multiple equilibrium paths, multiple steady states, and suboptimal allocations. The model generates slow adoption, as individuals optimally wait for others to adopt before doing so. We apply the theory to the adoption of SINPE, an electronic means of payment developed by the Central Bank of Costa Rica. Transaction-level data on the use of SINPE and a battery of administrative data sets on the network structure allow us to document sizable network effects exploiting plausible exogenous variation. A calibrated version of the model shows that the optimal subsidy pushes the economy to universal adoption.