Gaining Steam: Incumbent Lock-in and Entrant Leapfrogging

Richard Hornbeck, Shanon Hsuan-Ming Hsu, Anders Humlum and Martin Rotemberg

No 32384, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the long transition from water to steam power in US manufacturing, focusing on early users of mechanical power: lumber and flour mills. Digitizing Census of Manufactures manuscripts for 1850 to 1880, we show that as steam costs declined, manufacturing activity grew faster in counties with less waterpower potential. This growth was driven by steam powered entrants and agglomeration, as water powered incumbents faced switching barriers primarily from sunk costs. Estimating a dynamic model of firm entry and steam adoption, we find that the interaction of switching barriers and high fixed costs creates a quantitatively important and socially inefficient drag on technology adoption. Despite substantial entry and exit, switching barriers remained influential for aggregate steam adoption throughout the 19th century, as water power required lower fixed costs and therefore was attractive to relatively low productivity entrants. These entrants then became incumbents, locked into water power even if their productivity grew.

JEL-codes: D25 N61 O14 (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-com, nep-his and nep-lma
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