DYNAMIC MODELLING OF INNOVATION PROCESS ADOPTION WITH RISK AVERSION AND LEARNING

A dynamic decision-making model is presented of the adoption of an innovation process under uncertainty, taking into account producers' attitudes toward risk. The effects on adoption decisions of factors such as discount rate, firm size, and the level of risk aversion are investigated. It is fo...

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Bibliographic Details
Published in:Oxford economic papers 1990-04, Vol.42 (2), p.336-355
Main Authors: TSUR, YACOV, STERNBERG, MENACHEM, HOCHMAN, EITHAN
Format: Article
Language:English
Subjects:
Decision making
Decision making models
Discount rates
Discounting
Dynamic modeling
Economic theory
Economics
Effects
Emerging technology
Expected utility
Innovation
Innovation adoption
Innovations
Interest rates
Learning
Learning rate
Modelling
Prices
Risk
Risk aversion
Slow learners
Statistical variance
Technological innovation
Utility functions
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Summary:A dynamic decision-making model is presented of the adoption of an innovation process under uncertainty, taking into account producers' attitudes toward risk. The effects on adoption decisions of factors such as discount rate, firm size, and the level of risk aversion are investigated. It is found that it is not uncommon that risk aversion positively affects adoption. Although this seems somewhat counterintuitive, an examination of the long-run effects explains why this can occur. The risk-averse producer is unwilling to bear the risk of not trying and learning the innovation. The analysis also shows that, if the time rate of discount is greater than the rate of increase in the variability of income, there will either be full-scale adoption or no adoption at all. If the time rate of discount is less than the rate of increase in the variability of income, risk considerations become more important and will eventually dominate at later stages of the diffusion process.
ISSN:0030-7653
1464-3812
DOI:10.1093/oxfordjournals.oep.a041950