Rational expectations, optimal control and information technology adoption

Abstract.

The existing economics and IS literature on technology adoption often considers network externalities as one of the main factors that affect adoption decisions. It assumes that potential adopters achieve a certain level of expectations about network externalities when they have to decide whether to adopt a particular technology. However, there has been little discussion on how the potential adopters reach their expectations. This article attempts to fill a gap in the literature on adoption of information technology (IT), by offering an optimal control perspective motivated by the rational expectations hypothesis (REH) and exploring the process dynamics associated with the actions of decision makers who must adjust their expectations about the benefits of a new technology over time due to bounded rationality. Our model primarily addresses technologies that exhibit strong network externalities. It stresses adaptive learning to show why different firms that initially have heterogeneous expectations about the potential value of a technology eventually are able to arrive at contemporaneous decisions to adopt the same technology, creating the desired network externalities. This further allows the firms to become catalysts to facilitate processes that lead to market-wide adoption. We also discuss the conditions under which adoption inertia will take over in the marketplace, and the related managerial implications.