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Investment, Private Information and Social Learning: A Case Study of the Semiconductor Industry

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Author Info
Rose Cunningham (Bank of Canada)

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Abstract

Social learning models of investment provide an interesting alternative explanation for sudden changes in investment behaviour. Caplin and Leahy (1994) develop a model of social learning in which agents learn about the true state of demand from the investment suspension decisions of other agents. In this paper, I test the main predictions of their model using a unique database of investment projects undertaken by semiconductor plants. I find that firms that are installing a significant new technology appear to be influenced by social learning because they are more likely to suspend their investment project when other suspensions occur. A 1% increase in the number of other suspensions increases the probability of suspension by an average new technology plant by 3.6%. Others’ suspensions also significantly affects plants that use conventional technology, but it is a negative effect. The conventional technology plants are less likely to suspend their investment project when other firms suspend, which suggests that their payoffs are strategic substitutes as in a “war of attrition” game.

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Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 0409021.

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Length: 39 pages
Date of creation: 23 Sep 2004
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Handle: RePEc:wpa:wuwpma:0409021

Note: Type of Document - pdf; pages: 39. Bank of Canada Working Paper 2004-32
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Related research
Keywords: social learning; business cycles; investment; technology adoption; observational learning;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
L63 - Industrial Organization - - Industry Studies: Manufacturing - - - Microelectronics; Computers; Communications Equipment
C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
  11. Caplin, Andrew & Leahy, John, 1998. "Miracle on Sixth Avenue: Information Externalities and Search," Economic Journal, Royal Economic Society, vol. 108(446), pages 60-74, January. [Downloadable!] (restricted)
    Other versions:
  12. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862 Elsevier. [Downloadable!] (restricted)
    Other versions:
  13. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November. [Downloadable!] (restricted)
    Other versions:
  14. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April. [Downloadable!] (restricted)
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    Other versions:
  18. David Romer, 1992. "Rational Asset Price Movements Without News," NBER Working Papers 4121, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Caplin, Andrew S, 1985. "The Variability of Aggregate Demand with (S, s) Inventory Policies," Econometrica, Econometric Society, vol. 53(6), pages 1395-1409, November. [Downloadable!] (restricted)
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    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 06/152, International Monetary Fund. [Downloadable!]
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