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

We consider a variety of vintage capital models of a firm?s choice of technology under uncertaintyin the presence of adjustment costs and technology-specific learning. Similar models have beenstudied in a deterministic setting. Part of our objective is to examine the robustness of theimplications of the certainty models to uncertainty. We find that the answer crucially dependson the specification of the costs of adoption of a new vintage of technology. In particular, if thecost comes only in terms of accumulated technology-specific expertise (cf. Parente (1994)), wedemonstrate that the implications are robust for a variety of specifications of the firm?s productionfunction. However, once we develop a model in which each adoption requires a capital expenditure,predictions become increasingly di?erent as uncertainty increases. The model impliesthat 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?sexpertise (or human capital). Compared to the deterministic benchmark, the firm increases thepace of adoptions, making a smaller technological advance each time it upgrades its technology.Overall, uncertainty negatively impacts growth and the firm value.