Optimal Investment Strategy for Competing Learning Technologies: An Analytical Approach

Abstract

A major drawback of employing experience curves to model future technological change is the sensitivity of results to the rate of change, which in turn is typically associated with a high degree of uncertainty. In this chapter a model is developed and analytically solved to examine properties of models with endogenous technological change under uncertainty. It has three main objectives: illustrate specific properties of stochastic programs with experience curves, examine whether technological diversification is an optimal strategy in presence of experience curves and uncertainty, and provide a tool for decision making support. After a review of objectives, approach and current state of research in section 5.1, the basic model is developed in section 5.2 and successively expanded in sections 5.3 and 5.4. In section 5.5 several assumptions required for the preceding sections are critically reviewed. The chapter closes with an illustrative application of the model to two renewable technologies in section 5.6 and a discussion of key findings and implications in section 5.7.