This article studies how innovation reacts to climate change and shapes its economic impacts, focusing on U.S. agriculture. We show in a model that directed innovation can either mitigate or exacerbate climate change’s potential economic damage depending on the substitutability between new technology and favorable climatic conditions. To empirically investigate the technological response to climate change, we measure crop-specific exposure to damaging extreme temperatures and crop-specific innovation embodied in new variety releases and patents. We find that innovation has redirected since the mid-twentieth century toward crops with increasing exposure to extreme temperatures. Moreover, this effect is driven by types of agricultural technology most related to environmental adaptation. We next show that U.S. counties’ exposure to induced innovation significantly dampens the local economic damage from extreme temperatures. Combining these estimates with the model, we find that directed innovation has offset 20% of potential losses in U.S. agricultural land value due to damaging climate trends since 1960 and that innovation could offset 13% of projected damage by 2100. These findings highlight the vital importance, but incomplete effectiveness, of endogenous technological change as a source of adaptation to climate change.

We study the nonlinear pricing of goods whose usage generates revenue for the seller and of which buyers can freely dispose. The optimal price schedule is a multi-part tariff, featuring tiers within which buyers pay a marginal price of zero. We apply our model to digital goods, for which advertising, data generation, and network effects make usage valuable, but monitoring legitimate usage is infeasible. Our results rationalize common pricing schemes including free products, free trials, and unlimited subscriptions. The possibility of free disposal harms producer and consumer welfare and makes both less sensitive to changes in usage-based revenue and demand.