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

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Author Info
Hiroyuki Kasahara (Department of Economics, Queen's University)

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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---leads to a larger negative effect of uncertainty in relative factor prices on investment. The empirical implications 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 play an important role in explaining the impact of exchange rate volatility on investment.

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File URL: http://www.econ.queensu.ca/working_papers/papers/qed_wp_1014.pdf
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Publisher Info
Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1014.

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Length: 39 pages
Date of creation: Oct 2003
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Handle: RePEc:qed:wpaper:1014

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Related research
Keywords: Irreversible Investment Putty-Clay Technology Adoption Uncertainty

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Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes

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