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Technology Adoption under Relative Factor Price Uncertainty: The Putty-Clay Investment Model

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  • Hiroyuki Kasahara

Abstract

A plant has more flexibility in choosing among different technologies before undertaking an investment than after installing a specific machine. This paper argues that the irreversibility of factor intensity choice may play an important role in explaining the dynamics of investment in the presence of relative factor price uncertainty. A higher degree of irreversibility in the choice of factor intensity---characterized by the ex ante elasticity of substitution between different factors---leads to a larger negative effect of uncertainty in relative factor prices on investment. The empirical implications of the putty-clay investment model are examined using the plant-level Chilean manufacturing data for the period of time-varying exchange rate volatility. The econometric results show that the elasticity of substitution between imported materials and domestic materials is substantially higher at the time of a large investment and suggest that the irreversibility of factor intensity choice may potentially play an important role in explaining the impact of exchange rate volatility on investment

Suggested Citation

  • Hiroyuki Kasahara, 2004. "Technology Adoption under Relative Factor Price Uncertainty: The Putty-Clay Investment Model," 2004 Meeting Papers 39, Society for Economic Dynamics.
    • Handle: RePEc:red:sed004:39
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    3. Imbruno, Michele, 2019. "Importing under trade policy uncertainty: Evidence from China," Journal of Comparative Economics, Elsevier, vol. 47(4), pages 806-826.

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    More about this item

    Keywords

    irreversible investment; putty-clay; technology adoption; uncertainty;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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