INVESTMENT IN KNOWLEDGE - A GENERALIZATION OF LEARNING BY EXPERIENCE

Learning is often perceived as a cost-reducing endogenous by-product o f production processes. In many applications this by-product is modele d as a learning curve; that is, a simple function of time or of cumula tive production experience. In an earlier paper we presented an altern ative explanation where managers decide what resources to devote to kn owledge acquisition. In this paper we expand those results to a situat ion using a more flexible production technology and emphasizing discou nted cost. Our model explains resource and output behavior for a firm that is producing specialized units to contractual order. However, the results are quite general and have implications for investment in res earch, engineering, science and technology, software development, and worker training. We provide examples where the cost-minimizing produce r will choose to invest in knowledge creation early in the production program and then have the rate of investment decline over time. Other interesting results are noted by examining the optimal time paths of t he control and state variables in a comparative dynamics analysis.