Innovations, improvements, and the optimal adoption of new technologies

This paper extends the literature on technology adoption by introducing a distinction between technological breakthroughs (‘innovations’) and the engineering re/nements (‘improvements’) that follow such a breakthrough. Firms do not necessarily wait for a future technological breakthrough, but instead have an incentive to delay the adoption of a new technology until it is su2ciently advanced. We characterize a /rm’s adoption decision as the solution to a continuous time, in/nite horizon dynamic programming problem, which gives rise to an ordinary di4erential equation that is highly non-linear and does not have a closed-form solution. We thus employ projection techniques and show how these techniques can be applied to the analysis of optimal stopping problems. ? 2003 Elsevier B.V. All rights reserved. JEL classi"cation: D81; D92; O33