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

  • Rose Cunningham

    (Bank of Canada)

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

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Length: 39 pages
Date of creation: 23 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0409021
Note: Type of Document - pdf; pages: 39. Bank of Canada Working Paper 2004-32
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