Trends, Investment Behaviour and Policy Design
Edited by Raymond J.G.M. Florax, Henri L.F. de Groot and Peter Mulder
Chapter 6: Adoption Criteria, Diffusion and Firm Size: The Role of Learning in Reconciling Theories of Endogenous Technical Change with Empirical Evidence
Greg W. Hunter INTRODUCTION 1 The promise of progress through scientific inquiry gives rise to moments when empirical evidence disagrees with the predictions of theory. Typically, the pattern of developments following such moments begins with an explosion of new theories, each an iteration building on some prior theory, and each able to explain some part of the aberrant data. Eventually, one of these theories, through a novel approach, lays the groundwork for a new perspective on the relationships to be explained. In what follows, the literature on the economics of innovation will be presented in a way that alludes to this sort of ‘creative destruction’. The empirical literature on technical change has showcased two anomalies, adoption lag and slow diffusion. These studies have masked a third anomaly that is important to understanding not only how technical change influences decisions of the firm, but also the entire structure of an industry, which is firm size. In what follows, we will explain the connection between the three anomalies using a specific mixture of two rarely blended strands of economic theory. Drawing upon the economic literature that views information as a public good and from the theory of cartels, we show that a new technology can spur cooperation among firms. In particular, we show that in response to a new technology, a subset of firms in an industry may rationally decide to merge, or form a joint venture, to experiment with the technology, thereby sharing the costs of providing information about the suitability...
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