Long-run technology choice with endogenous local capacity

We develop a two-stage, two-location model to investigate long-run technology choice with endogenous capacity constraints. Rational managers determine the maximum capacities (and mobility constraints). Then, boundedly rational agents play a coordination game with the possibility to migrate. We consider two alternative strategy sets and two different objective functions for the managers and show that they affect the long-run technology choice in a non-trivial way. If the managers only care about efficiency in their respective locations, either coexistence of conventions or global coordination on the risk-dominant equilibrium will be selected, depending on the (effective) capacities of both locations. If they are concerned with scale and can choose mobility constraints, global coordination on the risk-dominant equilibrium without mobility will be selected in the long run. We then change the basic interaction to a $$n\times n$$ n × n pure coordination game where mis-coordination results in zero payoff, and show that, regardless of the constraint choices, all the agents will coordinate on the most efficient equilibrium. Copyright Springer-Verlag Berlin Heidelberg 2015