Abstract
Karshenas and Stoneman (RAND J Econ 24(4):503–528, 1993) gathered four theories of technology adoption: the rank, stock, order and epidemic effects. Tests of these four effects reveal support for rank and epidemic but not the stock or order effects. Since then numerous other studies have tried to find evidence in support of the stock and order effects. But evidence has been elusive, until now. Further, a survey by Frame and White (J Econ Lit 42:116–144, 2004) concludes that much more work is needed into financial innovation. This paper accomplishes three goals: (1) evidence is found to support certain technology adoption theories (the order effects and possibly the stock effects), (2) since the technology under consideration is a financial innovation called bounce protection, the paper answers Frame and White’s call for papers, and (3) refinements are made to the Karshenas and Stoneman methodology and found to be superior to the original empirical model.
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Notes
Intuition behind the arbitrage condition is that banks time their adoption for maximum benefits. They balance a falling price of the technology against the cost of waiting to adopt. KS also consider a profit condition whereby banks adopt once the net present value of adoption is positive. KS test these two conditions and find the arbitrage condition to be a better predictor of adoption. Thus the arbitrage condition is used here.
If data collection corresponds with the initial availability of the technology then we can think of these banks as being near point C when the technology is first available and should be observed adopting immediately. This will not change the hazard function math which follows.
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Acknowledgments
The author would like to thank Rob Porter, Shane Greenstein, Ron Braeutigam, Bill Rogerson, Nick Kreisle, Larry White, and an anonomous referee, for helpful comments and ideas.
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Fusaro, M.A. The rank, stock, order and epidemic effects of technology adoption: an empirical study of bounce protection programs. J Technol Transf 34, 24–42 (2009). https://doi.org/10.1007/s10961-007-9062-y
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DOI: https://doi.org/10.1007/s10961-007-9062-y