Investment Timing and Technological Breakthrough

59 Pages Posted: 14 Jul 2021

See all articles by Jean-Paul Decamps

Jean-Paul Decamps

University of Toulouse 1 - Toulouse School of Economics (TSE)

Fabien Gensbittel

University of Toulouse 1 - Toulouse School of Economics (TSE)

Thomas Mariotti

Universite de Toulouse 1 Capitole

Date Written: June 2021

Abstract

We study the optimal investment policy of a firm facing both technological and cash-flow uncertainty. At any point in time, the firm can decide to invest in a stand-alone technology or to wait for a technological breakthrough. Breakthroughs occur when market conditions become favorable enough, exceeding a certain threshold value that is ex-ante unknown to the firm. A microfoundation for this assumption is that a breakthrough occurs when the share of the surplus from the new technology accruing to its developer is high enough to cover her privately observed cost. We show that the relevant Markov state variables for the firm's optimal investment policy are the current market conditions and their current historic maximum, and that the firm optimally invests in the stand-alone technology only when market conditions deteriorate enough after reaching a maximum. Empirically, investments in new technologies requiring the active cooperation of developers should thus take place in booms, whereas investments in state-of-the-art technologies should take place in busts. Moreover, the required return for investing in the stand-alone technology is always higher than if this were the only available technology and can take arbitrarily large values following certain histories. Finally, a decrease in development costs, or an increase in the value of the new technology, makes the firm more prone to bear downside risk and to delay investment in the stand-alone technology.

Suggested Citation

Decamps, Jean-Paul and Gensbittel, Fabien and Mariotti, Thomas, Investment Timing and Technological Breakthrough (June 2021). CEPR Discussion Paper No. DP16246, Available at SSRN: https://ssrn.com/abstract=3886715

Jean-Paul Decamps (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

21 allée de Brienne
31015 Toulouse Cedex 6
France

Fabien Gensbittel

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Thomas Mariotti

Universite de Toulouse 1 Capitole ( email )

2 Rue du Doyen-Gabriel-Marty
Toulouse, 31042
France

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