Investment, Private Information and Social Learning: A Case Study of the Semiconductor Industry

Abstract

Social learning models of investment provide an interesting explanation for sudden changes in investment behaviour. Caplin and Leahy (1994) develop a model of social learning in which agents learn about the true state of demand from the investment suspension decisions of other agents. The author tests the main predictions of Caplin and Leahy's model using a unique database of investment projects undertaken by semiconductor plants. She finds that firms that are installing a significant new technology appear to be influenced by social learning, because they are more likely to suspend their investment project when other suspensions occur. A 1 per cent increase in the number of other suspensions increases by 3.6 per cent the probability that an average new technology plant will suspend their investment project. Suspensions by other agents also significantly affect plants that use conventional technology, but that effect is negative. The conventional technology plants are less likely to suspend their investment project when other firms suspend, which suggests that their payoffs are strategic substitutes, as in a "war-of-attrition" game.

Domestic Investment and the Cost of Capital in the Caribbean

“… See Fazzari, Hubbard, and Petersen (1988);Devereux and Schiantarelli (1989); andHoshi, Kashyap, and Scharfstein, (1991).13 SeeCaplin and Leahy (1994);Chetty (2004); andCunningham (2004).14 This is one crucially important departure from the q-model of investment. The perceived existence of adjustment costs often emerges from empirical applications of the neoclassical model through serial correlation in residual terms.…”

Learning by doing vs. learning from others in a principal-agent model

“…They find that learning spillovers are significant and may have contributed more to increases in productivity than conventional learning by doing effects. Cunningham (2004) uses data from semiconductor plants and finds that firms which are installing significantly new technologies appear to be influenced by social learning. Singh et al (2010) find similar effects in the open source software industry.…”

Domestic Investment and the Cost of Capital in the Caribbean

“… See Fazzari, Hubbard, and Petersen (1988);Devereux and Schiantarelli (1989);and Hoshi, Kashyap, and Scharfstein, (1991).13 SeeCaplin and Leahy (1994);Chetty (2004);and Cunningham (2004).14 This is one crucially important departure from the q-model of investment. The perceived existence of adjustment costs often emerges from empirical applications of the neoclassical model through serial correlation in residual terms.…”