Technology Adoption Under Imperfect Information

Abstract

This paper presents a static game theoretic model of a firm's decision to adopt a technological innovation of uncertain profitability which will reduce the production cost associated with the firm's output. Given the levels of adoption costs, discount rates and expectations regarding the profitability of the innovation, we determine the (Nash equilibrium) range of initial production costs for which each firm prefers to adopt the innovation. In addition, we ask whether a high-cost or a low-cost firm will be more likely to innovate, and whether a firm will be more likely to innovate if its rival is a high-cost or a low-cost firm.

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