Technology Transitions in the Presence of Uncertain Learning Curves: The Case of Green Tech

An important challenge facing contemporary society is whether and how firms will transition from established, fossil fuel-based technologies to green technologies such as electric vehicles, solar cells, and wind turbines. Prior research and policy discussions have recognized that these choices are based not on a comparison of the current state of these technologies but rather an assessment of technologies with varying trajectories of improvement. An environmentally friendly technology may initially be inferior (e.g., cost more) but become superior as the technology evolves. We argue that recognition of these trajectories is a necessary but not sufficient condition for understanding and guiding firms’ technological choices. These technological trajectories are often clouded by substantial uncertainty. While uncertainty is often seen as a barrier to change, in this paper, we highlight how uncertainty in these technological trajectories may, in fact, stimulate technological change. We model competition between two technologies – an older established technology and a new, presumed environmentally desirable technology. We find that the impacts of uncertainty are not uniform and that different levels and forms of uncertainty may encourage or discourage investment. Our core insight is that when uncertainty is large relative to the expected rate of technology improvement, it is uncertainty, rather than expectations about this rate of improvement, that determines the likelihood of choosing an environmentally friendly technology.