Strategic technology adoption and the productivity paradox

Why do technological revolutions fail to appear in productivity statistics? This paper develops a game-theoretic model in which firms with heterogeneous absorptive capacity make technology adoption decisions under competitive pressure. In equilibrium, high-capability firms adopt while low-capability firms either wait or adopt at a net loss due to competitive pressure. Aggregation across firm types generates a macro-level productivity paradox: substantial micro-level technological change produces negligible aggregate productivity gains. We provide micro-foundations for the Solow Paradox and derive three results: (i) a separating equilibrium in which only frontier firms adopt, generating the paradox as a composition effect; (ii) a pooling equilibrium in which competitive pressure forces unprofitable adoption; and (iii) multiple equilibria with coordination failure, where the Pareto-dominant equilibrium may not be selected. A welfare analysis shows that the social planner's optimal policy depends critically on whether non-adoption reflects coordination failure or genuine capability deficit. A formal decomposition shows that this composition channel is independent of, and additive to, the measurement channel identified in the directed technological change literature. We further show that workforce aging structurally expands the parameter space where the paradox persists, generating testable predictions for economies undergoing rapid demographic transitions.