Computer Adjustment Costs: Is Quality Improvement Important?

Abstract

This paper examines how the costs of adopting new technology are different from those of expanding capital stock by utilizing the data on 20 U.S. manufacturing industries from 1983 to 1998. Using the Generalized Method of Moment (GMM), I estimate a dynamic factor demand model in which the adjustment costs of computer investment are allowed to depend on both technology adoption and quantity expansion. The results suggest that an additional one dollar investment in computers causes on average 35 cents of adjustment costs, of which 25 cents is due to quantity expansion and 9 cents is due to technology adoption. In particular, the technology adoption cost increases significantly in the late 1990s because of a rapid increase in the technological gap in computers. Decomposition of total factor productivity (TFP) growth, however, reveals that the presence of adjustment costs in computer investment causes a modest bias in TFP growth.

Keywords: Computer, Adjustment cost, Technology adoption, Productivity growth

JEL Classification: D24, E22, O33, O47