Adjustment Costs, Learning-by-Doing, and Technology Adoption Under Uncertainty

35 Pages Posted: 31 May 2002  

Anna Pavlova

London Business School; Centre for Economic Policy Research (CEPR)

Date Written: December 2001

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.

Keywords: Technological Change, Vintage Capital, Optimal Scrapping, Learning-by-doing

JEL Classification: D81, D92, O31

Suggested Citation

Pavlova, Anna, Adjustment Costs, Learning-by-Doing, and Technology Adoption Under Uncertainty (December 2001). MIT Sloan Working Paper No. 4369-01; CARESS Working Paper No. 99-07. Available at SSRN: https://ssrn.com/abstract=308747 or http://dx.doi.org/10.2139/ssrn.308747

Anna Pavlova (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7000 8218 (Phone)

HOME PAGE: http://faculty.london.edu/apavlova

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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