M-RCBG Associate Working Paper No. 27
Experiential and Social Learning in Firms: The Case of Hydraulic Fracturing in the Bakken Shale
Thomas R. Covert
Abstract
Learning how to utilize new technologies is a key step in innovation, yet little is known about how firms actually learn. This paper examines firms' learning behavior using data on their operational choices, profits, and information sets. I study companies using hydraulic fracturing in North Dakota's Bakken Shale formation, where firms must learn the relationship between fracking input use and oil production. Using a new dataset that covers every well since the introduction of fracking to this formation, I find that firms made more profitable input choices over time, but did so slowly and incompletely, only capturing 67% of possible profi ts from fracking at the end of 2011. To understand what factors may have limited learning, I estimate a model of fracking input use in the presence of technology uncertainty. Firms are more likely to make fracking input choices with higher expected pro fits and lower standard deviation of profits, consistent with passive learning but not active experimentation. Most firms over-weight their own information relative to observable information generated by others. These results suggest the existence of economically important frictions in the learning process.