Adjustment Costs, Learning-by-Doing, and Technology Adoption Under Uncertainty
Name
Adjustment Costs, Learning by Doing 4369-01.pdf
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310.66 KB
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de6b0f6faf361511baa905553feba294
Author(s)
Pavlova, Anna
Date Issued
August 12, 2002
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 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.
Subjects
Learning-by-doing
Vintage capital
Technological change
Optimal scrapping
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