Shocks and Technology Adoption: Evidence from Electronic Payment Systems

We provide new evidence on the diffusion of technologies subject to positive adoption externalities. Using data on Indian electronic payment systems, we show that the 2016 demonetization - which led to a temporary reduction in cash - caused a permanent increase in the adoption of electronic payment systems by retailers. We show that these dynamics are consistent with a technology choice model with positive externalities in adoption. A number of distinct predictions of the model -- in particular, history-dependence in adoption and the importance of spillovers between neighboring firms -- receive strong support in the data. Furthermore, evidence on the impact of the demonetization on household consumption suggests that this rise in adoption played an important role in limiting the costs of the shock. Our results support the view that, when coordination problems slow down the diffusion of technology, aggregate shocks can act as coordination devices and shape adoption dynamics.