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

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  • Pavlova, Anna

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.

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File URL: http://hdl.handle.net/1721.1/1574
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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 4369-01.

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Date of creation: 12 Aug 2002
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Handle: RePEc:mit:sloanp:1574

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Phone: 617-253-2659
Web page: http://mitsloan.mit.edu/
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

Related research

Keywords: Optimal scrapping; Learning-by-doing; Vintage capital; Technological change;

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References

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  1. Maurice Obstfeld, 1992. "Risk-Taking, Global Diversification, and Growth," NBER Working Papers 4093, National Bureau of Economic Research, Inc.
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  11. Russell W. Cooper & John C. Haltiwanger, 2006. "On the Nature of Capital Adjustment Costs," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 611-633.
  12. John V. Leahy & Toni M. Whited, 1995. "The Effect of Uncertainty on Investment: Some Stylized Facts," NBER Working Papers 4986, National Bureau of Economic Research, Inc.
  13. Byong-Hyong Bahk & Michael Gort, 1992. "Decomposing Learning By Doing in New Plants," Working Papers 92-16, Center for Economic Studies, U.S. Census Bureau.
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  17. Jeremy Greenwood & Boyan Jovanovic, 2001. "Accounting for Growth," NBER Chapters, in: New Developments in Productivity Analysis, pages 179-224 National Bureau of Economic Research, Inc.
  18. Huggett, Mark & Ospina, Sandra, 2001. "Does productivity growth fall after the adoption of new technology?," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 173-195, August.
  19. Peter Klenow, 1998. "Learning Curves and the Cyclical Behavior of Manufacturing Industries," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 531-550, April.
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Cited by:
  1. Salvador Barrios & Eric Strobl, . "Learning by Doing and Spillovers: Evidence from Firm-Level Panel Data," Working Papers 2002-09, FEDEA.
  2. Correa, Paulo G. & Fernandes, Ana M. & Uregian, Chris J., 2008. "Technology adoption and the investment climate : firm-level evidence for Eastern Europe and Central Asia," Policy Research Working Paper Series 4707, The World Bank.
  3. Hall, Bronwyn H. & Khan, Beethika, 2003. "Adoption of New Technology," Department of Economics, Working Paper Series qt3wg4p528, Department of Economics, Institute for Business and Economic Research, UC Berkeley.

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