  We study the optimal investment policy of a firm facing both technological
and cash-flow uncertainty. At any point in time, the firm can decide to invest
in a standalone technology or to wait for a technological breakthrough.
Breakthroughs occur when market conditions become favorable enough, exceeding a
certain threshold value that is ex-ante unknown to the firm. A microfoundation
for this assumption is that a breakthrough occurs when the share of the surplus
from the new technology accruing to its developer is high enough to cover her
privately observed cost. We show that the relevant Markov state variables for
the firm's optimal investment policy are the current market conditions and
their current historic maximum, and that the firm optimally invests in the
stand-alone technology only when market conditions deteriorate enough after
reaching a maximum. Empirically, investments in new technologies requiring the
active cooperation of developers should thus take place in booms, whereas
investments in state-of-the-art technologies should take place in busts.
Moreover, the required return for investing in the stand-alone technology is
always higher than if this were the only available technology and can take
arbitrarily large values following certain histories. Finally, a decrease in
development costs, or an increase in the value of the new technology, makes the
firm more prone to bear downside risk and to delay investment in the
stand-alone technology.
