Waiting for Technology: Path Dependence as a Random Walk

41 Pages Posted: 8 Nov 1999

See all articles by James E. Bessen

James E. Bessen

Technology & Policy Research Initiative, BU School of Law

Date Written: October 1999

Abstract

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

Bessen, James E., Waiting for Technology: Path Dependence as a Random Walk (October 1999). Available at SSRN: https://ssrn.com/abstract=192169 or http://dx.doi.org/10.2139/ssrn.192169

James E. Bessen (Contact Author)

Technology & Policy Research Initiative, BU School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

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