ADJUSTMENT COSTS, LEARNING-BY-DOING, AND TECHNOLOGY ADOPTION UNDER UNCERTAINTY
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4369-01.pdf
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Author(s)
Pavlova, Anna
Date Issued
January 27, 2003
Series/Report no.
MIT Sloan School of Management Working Paper;4369-01
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 different as uncertainty increases. The
model implies that in booms, the firm accelerates adoptions of new technologies,
delaying them in recessions. Adverse effects 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
Subjects
Technological Change
Vintage Capital
Optimal Scrapping
Learning-by-doing
Persistent DSpace Link
