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

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  • Rose Cunningham

    (Bank of Canada)

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.

Suggested Citation

  • Rose Cunningham, 2004. "Investment, Private Information and Social Learning: A Case Study of the Semiconductor Industry," Macroeconomics 0409021, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0409021
    Note: Type of Document - pdf; pages: 39. Bank of Canada Working Paper 2004-32
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    Cited by:

    1. Arifovic, Jasmina & Karaivanov, Alexander, 2010. "Learning by doing vs. learning from others in a principal-agent model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1967-1992, October.
    2. Wang, Lanfang & Wang, Susheng, 2021. "Unusual investor behavior under tacit and endogenous market signals," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 76-97.
    3. Mr. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 2006/152, International Monetary Fund.

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    More about this item

    Keywords

    social learning; business cycles; investment; technology adoption; observational learning;
    All these keywords.

    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; Discrete Regressors; Proportions

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