Adjustment Costs, Learning-by-Doing, and Technology Adoption Under Uncertainty

Anna Pavlova

No 4369-01, Working papers from Massachusetts Institute of Technology (MIT), Sloan School of Management

Abstract: We consider a variety of vintage capital models of a firm?s choice of technology under uncertainty in the presence of adjustment costs and technology-specific learning. Similar models have been studied in a deterministic setting. Part of our objective is to examine the robustness of the implications of the certainty models to uncertainty. We find that the answer crucially depends on the specification of the costs of adoption of a new vintage of technology. In particular, if the cost comes only in terms of accumulated technology-specific expertise (cf. Parente (1994)), we demonstrate that the implications are robust for a variety of specifications of the firm?s production function. However, once we develop a model in which each adoption requires a capital expenditure, predictions become increasingly di?erent as uncertainty increases. The model implies that in booms, the firm accelerates adoptions of new technologies, delaying them in recessions. Adverse e?ects of a recession on the investment decisions are alleviated in part by the firm?s expertise (or human capital). Compared to the deterministic benchmark, the firm increases the pace of adoptions, making a smaller technological advance each time it upgrades its technology. Overall, uncertainty negatively impacts growth and the firm value.

Keywords: Optimal scrapping; Learning-by-doing; Vintage capital; Technological change (search for similar items in EconPapers)
Date: 2002-08-12
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: ADJUSTMENT COSTS, LEARNING-BY-DOING, AND TECHNOLOGY ADOPTION UNDER UNCERTAINTY (2003)
Working Paper: Adjustment Costs, Learning-by-Doing, and Technology Adoption under Uncertainty'
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