Technological Diffusion with Social Learning

This paper attributes the slow diffusion of innovations to an informational externality in the process of their adoption. When a new technology arrives its profitability is uncertain but each firm can learn progressively through observing the adoption experience of other firms. Given this prospect of social learning, every firm would prefer that other firms adopt before it does because this enables a better-informed adoption decision. In the absence of explicit coordination, the firms could end up in a sequence of waiting contests; this results in staggered adoptions even when all firms are ex-ante identical. The pace of diffusion is determined endogenously in this model and shown to depend on the characteristics of the innovation and of the learning process.