| Traditionally firms evaluate new technologies by return on investment. However, a critical factor is neglected in the analysis, namely, the separation of ownership and operation of the technology. The worker, who operates the technology, possesses private information regarding its effectiveness and the manager, who owns it, relies on worker's provision of that information.; A model of production is used to study the effects of the technological adoption on these two parties. The analysis shows that the information asymmetry creates a hold-up in technological adoption. The worker gains by shirking with the new technology, which cannot be verified by the manager whose benefit suffers. Expecting this, the manager will not adopt it.; It is proposed that the technology vendor's intervention can solve the problem. He can offer the manager an option of selling back to him the bought technology. It restricts worker shirking and provides an incentive for the manager to adopt the new technology.; If worker's shirking does not cause erratic production costs in the new environment, the option to buy back should be priced higher than the original purchase price of the new technology. Expecting that the manager has the option of switching back to the old technology, which does not allow him to shirk, the worker will shirk less in the new environment so that the manager gets more from the cost savings of the new technology and will not switch back after the new technology is adopted. Knowing this, the manager finds it beneficial to adopt the new technology and will not exercise the option upon the adoption. As a result, the buyback option is only an empty promise. However, the adverse selection problem may ensue. Some suggestions to avoid this are given.; On the other hand, if worker's shirking causes erratic production costs in the new environment, the option can be priced less than the original purchase price. This is because the stochastic production outcomes further restrict worker shirking. Accordingly, a 100% money-back guarantee provides a sufficient incentive for the manager to adopt and avoids the adverse selection problem. |
