Sequential Research and the Adoption of Innovations

The authors examine a firm able to adopt an innovation of uncertain profitability; reject the innovation; or delay deciding in order to acquire information on profitability. Deriving the optim al strategy from established sequential sampling literature, the authors constru ct a theory of the diffusion of innovation. Firms are assumed to hold identical prior expectations of an innovation's profitability, and to conduct privately ob served experiments on its profitability. The naturally arising distribution of e xperimental results yields a distribution of adoption times exhibiting establish ed facts on innovation diffusion. Finally the authors examine the implications o f strategic interactions between firms, where this affects both the learning pro cess and the results of adoption. Copyright 1986 by Royal Economic Society.