Technology Choice with Externalities - A General Equilibrium Approach

Research output: Working paper


This paper examines technology adoption in a general equilibrium economy under complete information. There is a number of identical consumers either working as self-employed entrepreneurs or supplying labor services to the industrial sector of the economy. As for the latter, we consider two scenarios: one in which the industry consists of a monopsonistic firm only, and the other where several firms compete on wage contracts for the available labor supply. In both cases, firms are price takers on the goods market and labor is the only input in production besides technology. We show that firms may choose to adopt inferior technologies, even when better ones are available at zero adoption costs. Two sources of non-marketed relations are shown to cause inefficient technology choices and inefficiencies of market allocations. First, technology adoption by firms exerts a positive externality on workers' outside options. Second, this positive externality generates a negative pecuniary externality on firms, in the form of an increase in the wage levels required to meet workers' participation and incentive compatibility constraints.
Original languageEnglish
Number of pages40
Publication statusPublished - 2006


  • Efficiency Wages
  • Monopsony
  • Production Externalities
  • Strategic Interactions
  • Technology Choice


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