Waiting for Technology: Path Dependence as a Random Walk
41 Pages Posted: 8 Nov 1999
Date Written: October 1999
The role of historical accident in technology selection has been difficult to measure. This paper develops a quantifiable model for a basic and widely applicable form of path dependence: the random walk. This real options model is applied to the transition in British cotton spinning at the beginning of the century.
In contrast to neoclassical models based on simple net present value calculations, when investment is irreversible, firms may choose to wait rather than to invest in a superior new technology. The magnitude and effect of this option to wait can be calculated. British spinning firms waited significantly before adopting superior technology, in line with the model. This failure to adopt (immediately) a superior technology can be described as ?lock-in? as in the path dependence literature. But this lock-in need not be permanent.
Moreover, lock-in to an inferior technology does not generally imply any market failure or any benefit to intervention. Path dependence may, however, exacerbate existing market distortions.
JEL Classification: O3, O14, E22, N63
Suggested Citation: Suggested Citation