Technology Adoption under Relative Factor Price Uncertainty: The Putty-Clay Investment Model

Hiroyuki Kasahara

No 39, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: A plant has more flexibility in choosing among different technologies before undertaking an investment than after installing a specific machine. This paper argues that the irreversibility of factor intensity choice may play an important role in explaining the dynamics of investment in the presence of relative factor price uncertainty. A higher degree of irreversibility in the choice of factor intensity---characterized by the ex ante elasticity of substitution between different factors---leads to a larger negative effect of uncertainty in relative factor prices on investment. The empirical implications of the putty-clay investment model are examined using the plant-level Chilean manufacturing data for the period of time-varying exchange rate volatility. The econometric results show that the elasticity of substitution between imported materials and domestic materials is substantially higher at the time of a large investment and suggest that the irreversibility of factor intensity choice may potentially play an important role in explaining the impact of exchange rate volatility on investment

Keywords: irreversible investment; putty-clay; technology adoption; uncertainty (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-ino
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Citations: View citations in EconPapers (4)

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Working Paper: Technology Adoption Under Relative Factor Price Uncertainty: The Putty-clay Investment Model (2003)
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