Technological Stickiness: Switching Costs and Firm Entry in the Long Transition from Water to Steam Power

We examine the long transition from water to steam power in US manufacturing, exploring how early advantages can delay technology adoption. We leverage variation in US counties’ waterpower potential, due to interacting water flow and elevation changes, which drove early mills’ waterpower-use. Using newly digitized Census of Manufactures manuscripts for 1850-1880, we show that as steam costs declined, mill activity grew faster in low-waterpower counties. This growth was driven by steam-powered entrants, as water-powered mills exited, suggesting waterpower lock-in. We estimate a dynamic model of firm entry and steam adoption, using geographic variation in waterpower potential to identify switching costs and quantify delay in steam adoption from waterpower lock-in. Firm entry spurred steam adoption, displacing incumbents, but even entrants became stuck in prior generation technology.

Written with Richard Hornbeck, Shanon Hsuan-Ming Hsu, and Anders Humlum, (all at the University of Chicago)