Heterogeneous Beliefs, Learning and Multiplicity in Directed Technical Change

The adoption of new technologies occurs at vastly different rates, and is often accompanied by heterogeneous beliefs about their future productivity. Due to strategic complementarities in innovation, transitions to new substitute technologies also manifest as coordination problems with their inherent multiplicity. This paper explores the pivotal role of imperfect information and beliefs in technological change, emphasising the reciprocal relationship between innovation pace and beliefs. A tractable continuous-time two-sector directed technical change model incorporating rational learning about the research productivity of new inventions reveals that belief heterogeneity leads to research misallocation, but it can also significantly influence the transition trajectory and equilibrium selection. A calibration to dirty versus clean technologies shows that with enough optimism about new (clean) technologies, the economy can transition away from otherwise locked-in old (dirty) technologies.