COMPENSATING FOR INFORMATION EXTERNALITIES IN TECHNOLOGY DIFFUSION-MODELS

The role of information in the adoption of new technologies is discuss ed, focusing on the role of information externalities when nonadopters observe adopters in order to gather information. A Bayesian model of aggregate adoption is derived and the social planner's relationship to the model is discussed. The fact that the information externality is uncompensated suggests that too little adoption may occur. The social planner's problem is solved numerically, demonstrating rapid learning on the part of adopters and a limited ability for the social planner t o compensate for the information externality.