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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.

Suggested Citation

  • Pavlova, Anna, 2002. "Adjustment Costs, Learning-by-Doing, and Technology Adoption Under Uncertainty," Working papers 4369-01, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  • Handle: RePEc:mit:sloanp:1574
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    Cited by:

    1. Bronwyn H. Hall & Beethika Khan, 2003. "Adoption of New Technology," NBER Working Papers 9730, National Bureau of Economic Research, Inc.
    2. Salvador Barrios & Eric Strobl, 2004. "Learning by Doing and Spillovers: Evidence from Firm-Level Panel Data," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 25(2), pages 175-203, June.
    3. Paulo G. Correa & Ana M. Fernandes & Chris J. Uregian, 2010. "Technology Adoption and the Investment Climate: Firm-Level Evidence for Eastern Europe and Central Asia," World Bank Economic Review, World Bank Group, vol. 24(1), pages 121-147, January.

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